U.S. stocks fell sharply as softer earnings from corporates and expectations of more aggressive Fed tightening dealt another blow to risk appetite. Jerome Powell said Wednesday that “a 50 basis-points hike was on the table” for the May meeting, as anticipated by traders. Yet, the threat of an even larger hike looms large in debates about Powell’s hawkish remarks.

With market headwinds intensifying, the S&P 500 slid 2.75% week-over-week, the Dow Jones Industrial Average slipped 1.86%, or 640 points, and the Nasdaq fell 3.83%. Small cap stocks followed suit (Russell 2000 down 3.21%). European markets also traded lower, though to a lesser extent, with the MSCI EMU down 0.16%. In Asia, the Nikkei edged up 0.04% while Bank of Japan Governor Haruhiko Kuroda said Monday that the yen's recent moves had been "quite sharp" and could negatively impact firms' business plans. A weaker yen (USD-JPY up 11.7% year-to-date) may help Japanese exporters enhance their price competitiveness in overseas markets. On the flip side, the surge in commodity prices hurts companies’ profits. In China, a sense of caution continued to shroud financial markets due to a new wave of Covid-19, the real estate bubble and ongoing geopolitical tensions. The Shanghai Composite lost 3.87% on the week.

Rising yields pressure growth stocks  

U.S. Treasury yields jumped (10-year yield closing at 2.90%, +7 basis points) after Fed Chair Powell’s hawkish stance on inflation. Against this backdrop, growth stocks took another nosedive.

Communication services went into free fall (-7.74% over the week, the worst performer among the S&P sectors), weighed down by Netflix (-36.82%, after the streaming company said it expected to lose two million global subscribers in the current quarter), FB-Meta (-12.40%) and Google (-6.00%). Energy also dragged the broader market lower, falling more than 4.5%, as oil prices pulled back (WTI crude down 4.56%) from Monday closing highs. Macro data pointing to economic weakness contributed to the risk-off mood. Health care lost ground again (-3.61%), pressured by a slump in HCA (-19.28% after reporting mixed quarterly results and cutting its full-year guidance) and Intuitive Surgical (-9.78%). Information technology shed 2.53% as investors dashed out of rate-sensitive stocks.

Very few sectors weathered the storm. These included real estate (+1.24%) and consumer staples (+0.39%). Investors appear to bet that both defensive sectors could be a good hedge against inflation.

Sharp decline in bond values

The selloff in U.S. Treasuries continues to impact the other bond segments. In Europe, the yield on German 10-year government bonds rose 13 basis points, from +0.84% to +0.97%. The yield on the French 10-year OAT topped +1.41% (+7 basis points), its highest level since January 2014.

Investment grade corporate bonds extended their losing streak to three weeks (-1.06% in Europe, -1.35% in the U.S. bringing their YTD performance to -11.95%). High-yield bonds dropped -0.16% in Europe and -1.14% in the U.S. Emerging debt in local currencies plunged -2.25% (-12.42% YTD).

The greenback remained strong (dollar index up +0.62% at 101.12), reflecting a classic flight-to-safety. By contrast, gold lost its gains from the previous week (-2.36% WTD, spot price at $1,931.60/Oz).

Lastly, there have been no miracles in the crypto space. Bitcoin fell below $40k in tandem with tech stocks.

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