U.S. stocks tumble on hawkish Fed minutes

Stocks and bonds fell sharply after the Fed meeting minutes signaled the central bank is set to raise interest rates sooner than expected. Treasury yields continued to rally accordingly (10-year T-note yield up 25bps at +1.77%, closing in on its 52-week high) in spite of a disappointing job report for December. 199,000 positions were added versus expectations for at least 400,000. The Nasdaq Composite was hit hard (-4.53%) as tech bulls were spooked by rate hike jitters. The S&P 500 also reversed course after the minutes, extending its decline to -1.87% over the week. The Dow Jones Industrial Average which is made up of blue-chip value stocks weathered the storm, losing only 106.64 points, or -0.29%, to 36,231.66.

The sharp sell-off in U.S. equities did not spark a wave of panic in Europe. The MSCI EMU edged up +0.06% week-over-week while the FTSE 100 gained +1.36%. By contrast, Asian stocks were more affected by the U.S. stock market correction. The Shanghai Composite lost -1.65%. Japan’s Nikkei was down -1.09% after four positive weeks.

Sector rotation accelerates

Information technology was the biggest drag (-4.69%) on the broad-based indexes, while rate-sensitive real estate sector (-4.94%) led declines among the S&P sectors. Health care stocks also succumbed to market rout. The sector plunged -4.65% with Pfizer and Moderna down -5.64% and -15.80% respectively. Likewise, it was a tough week for communications services (-2.68%), weighed down by Google (-5.30%), and consumer discretionary (-2.59%) in the wake of Amazon’s losing streak (-2.50%, after a 2.54% decline last week).

Only four sectors finished the week in positive territory. Energy was the best performer (+10.61%), pushed higher by rising U.S. oil prices (WTI crude up +4.91% at $78.90/barrel). Financials, mostly bank stocks, looked fairly attractive, supported by higher Treasury yields. Industrials (+0.68%) and consumer staples (+0.38%) also were among gainers, after struggling to remain above the flatline.

Bondholders freak out

The jump in U.S. Treasury yields reverberated around the world. In Germany, the 10-year Bund yield jumped +14bps from -0.18% to -0.04%, amid fresh signs of high inflation. In the same way, the French OAT yield rose from +0.20% to +0.29%, its highest level since May 2021.

Prices of IG corporate bonds nosedived (-0.36% in Europe, -1.47% in the U.S.) and credit spreads widened as investors shunned risk. In the high-yield space, it should be noted that the trend remained positive in Europe for the sixth straight week (+0.22% in Europe), while the U.S. counterparts fell heavily (-1.10%), wiping out all the gains made over the last three weeks. Emerging debt weakened too (-0.51% in local currencies). Elsewhere, gold lost momentum (spot price at $1,796.55/Oz, -1.78%), snapping its four-week winning streak. Lastly, Bitcoin slumped 10% below $42,000 after having reached the $67,000 mark in early November.

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