U.S. stocks bounced back on Friday after hitting their lowest level since March 2021 on Thursday. Yet major indices were still on a losing track for the sixth consecutive week, amid ongoing fears the Federal Reserve’s plan to tame inflation could hurt the economy. The latest data indeed showed inflation remains near 40-year highs. The consumer price index rose 8.3% in the year through April, above the 8.1% expected. The core CPI, which excludes food and energy, rose 0.6% in April following a 0.3% growth the prior month.
Against this backdrop, the Dow Jones Industrial Average slid 2.14% or 703 points. The S&P 500 fell 2.41% to close just above 4,000, bringing its year-to-date performance to -15.57%. The tech-heavy Nasdaq Composite shed 2.80%. It has given up almost a fourth of its value since the start of the year (-24.54%).
European stock indices regained some ground on Friday, with investors looking for bargains. By contrast with their U.S. peers, the MSCI EMU finished the week in positive territory (+1.35%, -14.06% year-to-date), snapping a five-week losing streak. The FTSE edged up 0.41% (+0.46% YTD). In Asia, equity indices closed mixed. The Shanghai Composite took the lead (+2.76%, -15.26% YTD) after dropping almost 8% over the last five weeks. Yet the recent China lockdowns are expected to slow growth in the world’s second-largest economy. Japan’s Nikkei fell 2.13% (-8.21% YTD).
Sea of red across sectors
The S&P consumer staples index was the only sector that managed to stay above the flatline (+0.30%). Communication services were not far behind (-0.16%) in the wake of Google’s product announcements at the I/O 2022 event. Alphabet stocks bucked the trend (+0.76%). Among the defensive sectors, health care (-0.94%) and utilities (-1.13%) outperformed the broad benchmark.
On the flip side, real estate continued its descent into hell (-3.87%, cumulative three-week loss of -12.73%). It was also a tough week for financials (-3.58%), under pressure from bank stocks as Treasury yields continued to lose ground on jitters about the global growth outlook. Big tech participated in the market selloff (information technology down 3.50%) as Apple shares plunged 6.47%. Microsoft stocks failed to fare better (-4.95%). There were also signs of increasing stress in the consumer discretionary sector with a sixth negative week in a row (-3.41%, cumulative six-week loss of -19%), weighed down by Tesla whose stocks slumped 11.10%, raising doubts about Elon Musk's Twitter purchase. Energy pared some of the gains made last week (-2.91% week-over-week, +6.86% month-to-date). Yet U.S. crude oil rose above $110/barrel on strong summer demand bets and supply tightness that pushed pump prices to record highs.
Trend reversal in government bond markets
The U.S. 10-year Treasury yield finished down 20 basis points at 2.935%, though red-hot inflation dispelled any hopes that the Federal Reserve would ease its pace of policy tightening. The yield curve flattened, with the 2-year to 10-year spread narrowing from 43bps to 34bps, increasing the chance of an inversion. Europe followed the same path with the 10-year Germany bund yield down 18 basis points, from +1.13% to +0.95%. The yield on the French 10-year OAT fell to 1.45%, dropping from the near 8-year high of 1.7% touched on May 9 and tracking the high demand for T-bonds in Europe.
The flight-to-quality revitalized high-quality corporate bonds. After five straight weeks of losses, they gained 0.90% in Europe (-7.34% YTD) and edged up 0.15% in the U.S. (-13.82% YTD). High yield bonds closed mixed (+0.34% in Europe, -0.61% in the U.S.). Once again, emerging debt in local currencies sank deeper into the red (-1.54% WTD, -16.86% YTD) while the greenback showed no signs of slowing down (dollar index above 104.5). As for precious metals, gold pushed higher on Friday but remained under pressure from a technical perspective (spot price at $1,811.79/Oz, down 3.81% week-over-week).
Crypto Rout
It was a wild week for cryptos. Investors headed for the exits after one of the largest stablecoins (TerraUSD, backed by the Bitcoin) lost its peg to the dollar, plunging more than 80%. In contrast, other stablecoins backed by dollar reserves such as Tether and USD Coin weathered the storm. Bitcoin fell over 15% in the wake of Terra’s crash before enjoying a bounce on Friday (-12% over the week). Crypto ETFs suffered accordingly. As an illustration, the ProShares Bitcoin Strategy ETF lost -18.83% over the first four days of the week. That said, funds linked to these assets posted net inflows of $69 million over the period as investors eventually bought the dip.
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