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WEEKLY SUMMARY: A tug of war between earnings growth and rates fears
It was another volatile week for risk assets. US large-cap equity indexes ended the week lower with the Nasdaq faring worse. Healthy earnings growth was offset by fears over monetary tightening. Warnings from U.S. officials that a Russian invasion of Ukraine might be imminent may have also contributed to a late-week sell-off. US CPI numbers (reported on Thursday) advanced 7.5% y/y, more than consensus expectations and its highest annual gain since February 1982. The upside CPI surprise, combined with hawkish comments from St. Louis Fed President Bullard, sent short-term rates racing higher on Thursday, resulting in a flattening of the yield curve. The 2-year U.S. yield reached its highest level since January 2020 as investors priced in expectations for an accelerated rate hike scheduled by the Fed. Meanwhile, the 10-year U.S. yield surpassed 2.00% for the first time since the summer of 2019. Shares in Europe rallied (+1.6%), buoyed by strong corporate earnings. Chinese stocks rose amid supportive official comments and a perception that the country’s regulatory crackdown cycle had peaked. Oil and Gold rallied on the back of Russia-Ukraine tensions. Cryptocurrencies were volatile.
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Most of US equities indices rose to record highs, as investors wagered that a “red sweep” (Republicans winning Presidency, Senate and Congress) would result in faster earnings growth, looser regulations, and lower corporate taxes. The small-cap Russell 2000 Index surged 8.57% for the week but was the sole benchmark to remain out of record territory. Meanwhile, the Dow Jones hit 44.000 for the first time while the S&P 500 closed just shy of 6,000, up 4.7% for the week, its best weekly gain in almost a year. On Thursday, the Fed announced a 25bps rate cut, its first easing move since cutting rates by 50 basis points in mid-September. In terms of economic data, the October ISM services sector activity came in at 56.0, well above expectations and the best reading since August 2022. U.S. Treasuries generated positive returns heading into Friday, as yields largely ended lower than where they ended the previous week.