Wall Street surged again amid better-than-expected (or better-than-feared) earnings. Unsurprisingly, the Fed raised rates by 75 basis points on Wednesday but Jerome Powell reaffirmed that the central bank "would not hesitate" to move to a more restrictive stance to tame inflation, if necessary. Furthermore, he said that the U.S. economy is performing “too well” to be in a recession, as evidenced by a still-robust labor market. Yet data on Thursday showed it declined by 0.9% in the second quarter, pushing the country into a “technical” recession (i.e. two consecutive quarters of GDP contraction). But many economists are inclined to downplay the scenario of a severe recession with an uncommonly low 3.6% unemployment rate.
Against this backdrop, the Dow Jones Industrial Average rose 946 points, or +2.97%, to 32,845.13 (-9.60% year-to-date). The S&P 500 gained 169 points, or +4.26%, to 4,130.29 (-13.34% YTD) and the Nasdaq Composite added 557 points, or +4.70%, to 12,390.69 (-20.80% YTD).
European stocks performed in unison. The MSCI EMU jumped +2.93% (-14.49% YTD), while the FTSE 100 was up +2.02% (+0.53% YTD). On the flip side, Asian markets struggled to find their footing. Japan’s Nikkei edged down -0.40% (-3.44% YTD) as the yen strengthened +2.14% versus the greenback. The Shanghai composite was down -0.51% (-10.62%). China's factory activity contracted unexpectedly in July, with the PMI falling to 49.0 compared with 50.2 in June, as the country is still mobilized to fight against the Covid-19 pandemic.
All 11 S&P sectors in positive territory
For the second time this year, all the economic sectors finished the week in positive territory.
Energy was the best performer (+10.31%) as oil prices soared (WTI up +4.14%) on expectations Russia's reduction in natural gas supply to Europe could result in a switch to crude. It is also worth noting that all the themes shaping the energy transition (solar energy, nuclear energy, hydrogen economy, etc) exhibited double-digit returns week-over-week.
Consumer discretionary also shined (+5.55%) in the wake of Amazon (+10.24%) and Tesla (+9.15%). Investors piled into tech stocks (+5.08%) with Microsoft up +7.83%, after the company announced that its revenue would grow by double digits for this fiscal year, strongly driven by demand for cloud computing services. Overall, defensive sectors fared well with utilities up +6.46% and real estate up +4.86%.
U.S. Treasury yields fall again after GDP news
Once again, the U.S. 10-year Treasury yield finished down 10 basis points from 2.76% to 2.66%. Treasury yields continued to price in the prospect of a less hawkish Fed but the yield on the 2-year Treasury remained 22 basis points higher than the 10-year yield. By comparison, the 2-year yield was over one percentage point lower than the 10-year yield a year ago. Such an inversion was the harbinger of economic downturns in the past.
In Germany, the 10-year Bund yield slipped from 1.03% to 0.82%. The Italy-Germany 10-year Government bond spread value slightly decreased to 223bps.
Falling yields gave another boost to the riskiest bond classes. Investment grade corporate bond prices were up +0.74% in the U.S. and +1.15% in Europe. High-yield bonds gained +1.29% in Europe and +1.63% in the U.S. Emerging debt also rallied (+2.02% in local currencies) while the dollar index was declining below 106 (-0.77% for the week).
Elsewhere, gold showed positive momentum after several weeks in the red. The spot price rose +2.22% at $1,765.94/Oz. In the crypto space, the world's largest cryptocurrency by market capitalization (BTC USD) gained 5%, close to the $24k threshold. By contrast, the crypto trading platform Coinbase fell 11% on reports the company is facing a probe from the SEC over whether it allowed Americans to improperly trade in unregistered securities.
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