Stocks and bonds fell sharply after the Fed meeting minutes signaled the central bank is set to raise interest rates sooner than expected. Treasury yields continued to rally accordingly (10-year T-note yield up 25bps at +1.77%, closing in on its 52-week high) in spite of a disappointing job report for December. 199,000 positions were added versus expectations for at least 400,000. The Nasdaq Composite was hit hard (-4.53%) as tech bulls were spooked by rate hike jitters. The S&P 500 also reversed course after the minutes, extending its decline to -1.87% over the week. The Dow Jones Industrial Average which is made up of blue-chip value stocks weathered the storm, losing only 106.64 points, or -0.29%, to 36,231.66.

The sharp sell-off in U.S. equities did not spark a wave of panic in Europe. The MSCI EMU edged up +0.06% week-over-week while the FTSE 100 gained +1.36%. By contrast, Asian stocks were more affected by the U.S. stock market correction. The Shanghai Composite lost -1.65%. Japan’s Nikkei was down -1.09% after four positive weeks.

Sector rotation accelerates

Information technology was the biggest drag (-4.69%) on the broad-based indexes, while rate-sensitive real estate sector (-4.94%) led declines among the S&P sectors. Health care stocks also succumbed to market rout. The sector plunged -4.65% with Pfizer and Moderna down -5.64% and -15.80% respectively. Likewise, it was a tough week for communications services (-2.68%), weighed down by Google (-5.30%), and consumer discretionary (-2.59%) in the wake of Amazon’s losing streak (-2.50%, after a 2.54% decline last week).

Only four sectors finished the week in positive territory. Energy was the best performer (+10.61%), pushed higher by rising U.S. oil prices (WTI crude up +4.91% at $78.90/barrel). Financials, mostly bank stocks, looked fairly attractive, supported by higher Treasury yields. Industrials (+0.68%) and consumer staples (+0.38%) also were among gainers, after struggling to remain above the flatline.

Bondholders freak out

The jump in U.S. Treasury yields reverberated around the world. In Germany, the 10-year Bund yield jumped +14bps from -0.18% to -0.04%, amid fresh signs of high inflation. In the same way, the French OAT yield rose from +0.20% to +0.29%, its highest level since May 2021.

Prices of IG corporate bonds nosedived (-0.36% in Europe, -1.47% in the U.S.) and credit spreads widened as investors shunned risk. In the high-yield space, it should be noted that the trend remained positive in Europe for the sixth straight week (+0.22% in Europe), while the U.S. counterparts fell heavily (-1.10%), wiping out all the gains made over the last three weeks. Emerging debt weakened too (-0.51% in local currencies). Elsewhere, gold lost momentum (spot price at $1,796.55/Oz, -1.78%), snapping its four-week winning streak. Lastly, Bitcoin slumped 10% below $42,000 after having reached the $67,000 mark in early November.

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