Treasury yields jumped sharply (10-year yield at +2.72%, +34 basis points week-over-week) after Fed Governor Lael Brainard said the central bank is prepared to bring inflation back to its target with strong rate tightening if need be, and could start to “reduce its balance sheet at a rapid pace as soon as the May meeting.” Said differently, the Federal Reserve will raise interest rates by 50 basis points at its next meeting and initiate a sizable drawdown of its balance sheet ($95 billion expected in May).
Against this backdrop, Wall Street’s main indices dropped, weighed down by tech stocks as the latter are particularly sensitive to interest rate swings. The Dow Jones Industrial Average edged down 0.28%, or 97 points, the S&P 500 fell 1.27% and the tech-heavy Nasdaq plunged 3.86%. Small cap stocks felt the most pain (Russell 2000 down 4.62%).
Elsewhere, the major equity indices closed mixed. In Europe, the MSCI EMU lost 1.31% while the FTSE gained 1.75%. Overall, Asian markets did not manage to reverse their broadly bearish trend. The Hang Seng and the Shanghai composite were down 0.76% and 0.94% respectively, as the worst coronavirus outbreak in Shanghai in two years appeared to be worsening. The Nikkei slumped 2.46%. India’s Nifty was one of the few indices which finished the week in positive territory (+0.64%).
Tech pressured by surging Treasury yields
The tech sector took a nosedive (-4.03%) after Brainard’s speech. Consumer discretionary (-3.28%) was the second-largest detractor to performance in the S&P 500 this week, with Amazon and Tesla stocks down 5.56% and 5.45% respectively. It was also a tough week for communication services (-2.72%) as Google-Alphabet remained on the back foot (-4.75%).
By contrast, health care led the pack (+3.44%) with Pfizer shares up 6.98%. The gain came after the big drugmaker announced plans to buy privately held ReViral for up to $525 million. Energy also fared well (+3.21%) in spite of a decline of 1.02% in the WTI crude price. U.S. crude inventories rose by 1.1 million barrels for the week ended March 31. On the flip side, it was a big week for natural gas with skyrocketing prices (+10.5%) above $6.3/MMBtu in the wake of persistent supply concerns, lingering cold weather and sanctions against Russia.
Defensive sectors were the other winners of the week: consumer staples (+2.73%), utilities (+1.91%) and real estate (+0.76%). These three sectors continued to enjoy strong momentum, extending their winning streak to four weeks.
Bond markets in the doldrums
Treasuries showed a substantial move to the downside after the Federal Reserve’s minutes. Unsurprisingly, the other classes of bond assets were hit by the US Treasury wobble.
The yield on German 10-year government bonds rose 15 basis points, from +0.56% to +0.71%. The yield on the French 10-year OAT topped +1.25%, the highest in over 7 years amid inflation fears and political risk in the wake of the presidential election.
Investment grade corporate bonds suffered heavy losses (-0.74% in Europe, -2.10% in the U.S.). High-yield bonds lost -0.34% in Europe and -1.44% in the U.S.
Emerging debt crashed again (-1.54%) as the greenback gained momentum (dollar index up +1.27%), helped by safe-haven flows. In the same vein, gold shined again (+1.14% WTD, spot price at $1,947.54/Oz) as investors are increasingly worried about the impact of the Russo-Ukrainian war on the global economy.
Lastly, it was a tough week for crypto investors. Bitcoin [BTC] slid toward $42k (down 8.6%) while Ethereum [ETH] plunged 7.3%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
