Stocks sink on looming QE tapering

Week from 16 to 22 August 2021

Despite a tech rebound on Friday, global stock markets dropped as the minutes from the Federal Reserve's July 27-28 meeting showed that most policymakers support a taper of asset purchases this year. The S&P 500 slipped 0.59% week-over-week, the Dow Jones Industrial Average fell 1.11%, or 395 points. The Nasdaq slid 0.73%. The CBOE Volatility index (VIX) jumped more than 3 points (+20%). Small cap stocks underperformed their large-cap counterparts for the second week in a row (Russell 2000 down 2.50%). Elsewhere, European and Asian markets slumped, mimicking the volatility seen in the U.S. (MSCI EMU: -1.92%; NIKKEI: -3.45%; Shanghai Composite: -2.53%). Emerging markets nose dived (MSCI EM: -4.69%).  

The intention of Fed officials to move away from ultra-easy monetary policy drove nervous investors toward safe-haven assets such as U.S. government securities (benchmark 10-year yield at +1.26%, down 3bps), U.S. dollar (dollar index: +1.02%) and gold (+0.33%).

Cyclicals drag, defensives shine

Cyclicals wiped out last week’s gains. Once again, energy was the worst performer (-7.33%) as oil prices plunged (WTI crude down 8.94%) on fears that mobility restrictions in China may hit fuel demand. Materials (-3.10%), industrials (-2.34%), financials (-2.31%) followed behind. It was also a tough week for consumer discretionary (-2.24%), as Amazon (share down 2.85%) reportedly warned third-party merchants that antitrust laws approved in June could limit their ability to hawk their commercial wares on its marketplace.

The most defensive sectors led the pack (utilities: +1.80%, health care: +1.77%, real estate: +0.55%, consumer staples: +0.43%). Information technology fared well too (+0.44%), helped by Microsoft (+3.93%). The tech giant is about to rise business subscription prices on its suite of Microsoft 365 products.

Yields resume their downward trend 

U.S. Treasury yields held near recent lows. Risk aversion drove demand for government bonds. Benchmark 10-year T-notes closed at +1.26%. By contrast, U.S. corporate bond prices declined (investment grade bonds down 0.26%) while their European counterparts managed to stay above the flatline (+0.05%). High yield bonds showed no significant changes (-0.04% in Europe, -0.06% in the US) but emerging debt lost ground (-1.25% in local currencies), hit by a stronger dollar.

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