Wall Street's main indexes rallied sharply on Friday after Apple (AAPL) closed the curtain on big tech earnings with third-quarter results topping estimates. Yet investors had punished other tech giants earlier this week. Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN) and Meta (META) all saw their shares take a nosedive in the wake of their earnings reports.

The strong end to the week for U.S. stocks came even as the U.S. 10-year Treasury yield was rising again above the 4% threshold after falling to 3.91% Thursday. The Fed’s preferred inflation measure (PCE price index - personal consumption expenditures, excluding food and energy) advanced 5.1% on a year-on-year basis in September, slightly below the 5.2% predicted. This data encouraged further bets on a smaller interest rate hike in December. Last but not least, the U.S. economy rebounded in the third quarter, growing at a 2.6% annualized rate, driven by a jump in exports despite a stronger greenback. Yet, the GDP report also showed signs of a broad slowdown as consumer and business spending faltered under surging interest rates and high inflation.

The S&P 500 rose 3.95% week-over-week. Despite this rebound, the benchmark index is down 18.15% so far in 2022, still on track for its biggest decline since 2008. The Dow Jones Industrial Average gained 5.72% or 1,779 points (-9.57% for the year), while the tech-heavy Nasdaq index was up 2.24% (-29.04% year-to-date).

European stocks followed suit while the European Central Bank raised interest rates by 75 basis points as expected. The MSCI EMU jumped +3.71% (-18.16% YTD). The FTSE 100 added +1.12% (-4.56% YTD). Rishi Sunak became UK’s new Prime Minister on 25 October 2022 amid red-hot inflation and deep cost-of-living crisis. Financial markets were unnerved after Truss’ disastrous economic policy missteps. Sunak’s meteoric ascent was broadly welcomed by investors as evidenced by the UK 10-year Gilt yield, down 62 basis points week-over-week. The GBP-USD spiked after the confirmation. One pound could buy a little more than $1.16, up 2.46% on the week.

On the flip side, emerging markets fell again (MSCI EM down 2.25% over the week, down 31.37% YTD), highlighting how depreciating currencies, rising borrowing costs and recession fears shake developing economies. China stocks also tumbled after President Xi secured a third term, heightening fears economic growth will be sacrificed for ideological policies. The Hang Seng index tumbled to its 2008 financial crisis low (down 8.32% for the week, down 36.48% year-to-date). The yuan hit a 14-year low (USD-CNY above 7.25, +14% YTD) as China announced a new leadership team and imposed fresh Covid lockdowns in a number of cities. Foreigner investors are fleeing Chinese stocks at a record pace, tipping the year-to-date net flow into negative territory. 

The Indian stock market appears to benefit from those withdrawals. The Nifty 50 index was up 1.20% over the week and up 2.49% YTD. In Japan, the Nikkei index edged up +0.80% (-5.86% YTD).

Communication Services pushed lower by Meta   

META stocks fell 23.70% after a stark revenue report, extending their losses to more than 70% this year. The GOOG stock (down 4.83% over the week, down 33.25% YTD) also weighed on communication services, the only S&P 500 sector in the red this week (-2.85%) and the worst performer in 2022 (-38.46%). Consumer discretionary (+0.71% for the week, -29.70% for the year, second worst performer in 2022) also pushed the broad market lower as the AMZN stock was in freefall (-13.33% for the week, -37.97% for the year). Amazon, which is widely seen as a bellwether for the global e-commerce industry, hit market sentiment with weak results and gloomy forecast, warning that inflation-wary consumers and businesses had less money to spend.

By contrast, investors piled into the other S&P sectors, including the most defensive such as utilities (+6.48%), consumer staples (+6.09%) and heath care (+5.00%). Industrials shone (+6.73%) as many heavyweights reported better-than-expected quarterly results amid price hikes and higher sales volume. Among them, Caterpillar (CAT) gained 15.30% through the week. In addition to stellar numbers for its third quarter, the world's leading manufacturer of construction and mining equipment has also projected solid revenue growth and a significantly higher adjusted operating profit margin for its fourth quarter.

The IT sector fared well too (+4.28%) as Apple Inc (AAPL) shares jumped 5.75%. The iPhone maker's fourth-quarter results showed some resilience in the face of a weak economy and strong US dollar that have led to disappointing reports from other tech companies such as Microsoft. The MSFT stock fell 2.58% over the week (down 29.87% year-to-date).

Lull in bond markets  

Government bonds snapped a 13-week losing streak. Even if a fourth consecutive 75bp rate hike from the Federal Reserve is fully priced by financial markets, investors expect that the central bank language will be a little softer next week, keeping the option open for slower hikes ahead (50bp in December for instance). A view that got some traction recently (cf. San Francisco Fed President Mary Daly’s dovish comments last week). Should the Fed confirm a 75bp rate hike on 2 November, the effective funds rate would move up to 3.83% (3.08% + 0.75%), compared with the 4.8% terminal rate currently expected by financial markets (according to Fed funds futures). Last week, Former Treasury Secretary Larry Summers tweeted that the increase in the terminal rate to above 5% is “a kind of milestone.” 

For the week, the yield on the 10-year Treasury retreated 21 basis points to 4.01% from 4.22%. The UTEN single bond ETF that invests in the 10-year US Treasury note was up 1.97% (down 1.70% month-to-date). The 2-year Treasury yield closed at 4.41%, falling by around 7 basis points.

In Europe, the ECB raised interest rates by 75 basis points as expected. The German 10-year yield lost 32 basis points over the week (2.10%) while the French OAT yield with the same maturity closed at 2.60% (-39 basis points). The Italy Government Bond 10Y outperformed, reducing its yield premium over German bunds by as much as 31 basis points to 205 basis points. In the UK, Rishi Sunak’s nomination as prime minister was broadly welcomed by investors. The UK 10-year Gilt yield slipped by about 62 basis points to 3.47%. The GBP-USD spiked after the confirmation. One pound could buy a little more than $1.16, up 2.46% on the week.

Falling yields gave a boost to the riskiest bond classes. Investment grade corporate bond prices were up +2.08%* in Europe (-13.78% year-to-date) and up +2.38%** in the U.S. (-20.89% year-to-date). High-yield bonds gained +1.67% in Europe*** (-12.39% year-to-date) and +2.74% in the U.S.**** (-9.29% year-to-date).

Emerging debt***** also rallied (+1.71% in local currencies, -21.44% year-to-date).

 

*Markit iBoxx Euro Liquid Corporates TR Index 

**Bloomberg Barclays Global Aggregate Corporate Bond TR Index

***Markit iBoxx EUR Liquid High Yield TR Index

****Markit iBoxx USD Liquid High Yield Capped TR Index 

***** Bloomberg Barclays Emerging Markets TR Index

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