Wall Street's main indexes fall despite stronger economic data

This was a strange week that first saw markets bet a historic 1% Fed rate hike after hotter-than-expected inflation data. US inflation jumped 9.1% in June in its biggest yearly increase in 40 years. They then offset part of their losses as Fed members said they would favour a 75-basis point hike at the July meeting. Better-than-expected retail sales also pushed the broad market higher Friday, but not enough to finish the week in positive territory.

The S&P 500 fell 0.93% (-18.95% year-to-date), the Dow Jones Industrial Average edged down 0.16% (-13.90% YTD), or 51 points. The Nasdaq was down 1.57% (-26.80% YTD).

European markets did not fare better. The MSCI EMU lost 1.12% (-19.56% YTD) while the FTSE slipped 0.56% (-3.05% YTD). Asian markets were mixed. The Shanghai Composite plunged 3.81% (-11.31% YTD), as the highly transmissible BA.5 Omicron variant is spreading rapidly, leading several cities to impose new restrictions. By contrast, Japan’s Nikkei outperformed its peers, notching a second straight week of gains (+1.02% week-over-week, -6.96% YTD).

Almost all the S&P sectors slid into the red      

The S&P consumer staples index was the only sector that managed to stay above the flatline (+0.11%). Other defensive sectors such as utilities (-0.16%) and real estate (-0.45%) were not far behind. Likewise, information technology did better than the broad market (-0.33%) against a backdrop of falling Treasury yields. Yet Microsoft fell 4.09% as the tech giant announced job cuts.

It was a tough week for energy stocks (-3.07%) after OPEC flagged fresh demand concerns. Nymex August WTI oil futures ended at $97.59 a barrel, down 6.87% over the week. Communication services (-3.26%) were also among the major decliners with Alphabet down 6.16%. The company initiated a 20-for-1 stock split after market close on Friday. Furthermore, it had said on Wednesday it would slow the pace of hiring for the rest of the year. 

Consumer discretionary (-1.04%) was weighed down by Tesla (-4.27%) though Elon Musk announced that he was terminating his $44 billion deal to buy Twitter. At the same time, AXS Investments, a California-based asset manager, launched eight single-stock leveraged ETFs on Thursday, including a bearish bet on Tesla stocks (TSLA). 

Financials also finished in negative territory (-0.90%). Citigroup delivered better-than-expected profit and revenue but its earnings still fell along with Wells Fargo & Co amid unfavourable market conditions. 

U.S. 10-year Treasury yield retreats as the Fed cools jumbo hike bets

The U.S. 10-year Treasury yield finished down 16 basis points from +3.08% to +2.92%. That’s why long-term government bond ETFs are among the week’s top 20 performers. The yield curve remains inverted with the 10-2 year spread at -0.20%. 

In Germany, the 10-year Bund yield tumbled from 1.35% to 1.13% as investors flocked to safer assets after Italian Prime Minister Mario Draghi resigned. Populist coalition partner Five Star indeed withdrew its support in a confidence vote. The Germany-Italy 10-year spread value topped -225 basis points.

Against this backdrop, investment grade corporate bonds closed higher (+0.54% in the U.S and +0.79% in Europe). High yield bonds were up +0.29% in Europe and +0.54% in the U.S. 

In contrast, emerging debt in local currencies plunged again (-1.57%) after the dollar index rose to its strongest since May 2002 (107.98). The euro hit parity with the U.S. dollar for the first time since 2002.