Last week’s rebound was somewhat stunning. But a bear market rally never lasts long. Leading U.S. indices closed lower this week as worries about a recession were mounting in the wake of Federal Reserve rate hikes to tame red-hot inflation.
The S&P 500 dropped 2.21% over the week to 3,825.33 (-19.74% year-to-date), while the Dow Jones Industrial Average slipped 1.28% (-14.42% YTD). The Nasdaq Composite took the biggest hit, plunging 4.13% (-28.87% for the year). European markets followed suit with the ECB under pressure after Spain's annual inflation rate reached 10.2% in June, the highest since April 1985. The MSCI EMU lost 2.03% (-20.12% YTD) while the FTSE edged down 0.56% (-2.92% YTD).
In Asia, China was the silver lining to depressed markets, extending its winning streak to five weeks. Its manufacturing activity expanded at its fastest pace in 13 months in June. Yet covid policies continue to threaten the current outlook. The Shanghai composite gained 1.13% (-6.93% for the year). Japan’s Nikkei slid 2.10% (-9.92% YTD).
Sector rotation in the spotlightSector rotation was in full swing. Defensive stocks like utilities (+4.11%), health care (+0.38%) and consumer staples (+0.28%) helped the broader market reduce its losses. In the same way, energy stocks recovered from several rough sessions, ending the week in positive territory (+1.29%) as WTI crude oil closed up 0.75%.
Consumer discretionary was the biggest drag (-4.69% over the week) on the broader market, with Tesla and Amazon falling more than 7.5% and 5.9% respectively. Communications services (-4.54%), weighed down by Alphabet (-7.98%) and Meta (-5.95%), were not far behind. Ditto for information technology (-4.47%) even as Treasury yields slipped again.
Downside risk protection through long-term bonds, crypto routInvestors increased their Treasury holdings pushing yields on the 10-year note lower, just below 2.9%, as data showed consumer spending is less robust than expected. The yield curve continued to flatten, with the 2-year to 10-year spread narrowing to +5bps, increasing the chance of an inversion.
Europe followed the same path with the 10-year Germany bund yield down 21 basis points, from +1.44% to +1.23%.
The flight-to-quality revitalized high-quality corporate bonds. Investment grade corporate bond prices were up +0.23% in the U.S and +0.92% in Europe. High-yield bonds lost 1.52% in the U.S. and 1.51% in Europe. Emerging debt was down 1.04% in local currencies as the index dollar strengthened above 105 (+0.9%). Lastly, gold lost momentum (spot price at $1,811.43/Oz, down 0.95% for the week).
Lastly cryptocurrencies joined the general risk-off sentiment this week, with Bitcoin down 9% below $19,200, and Ethereum down 15% below $1,050.