Stocks Record First Weekly loss this Year
Stocks recorded their first weekly loss of 2018, with the S&P 500 Index suffering its worst weekly drop in two years. Energy stocks led the declines due to a plunge on Friday following lower-than-expected earnings results from Chevron and ExxonMobil. Health care shares were also especially weak after tumbling Tuesday on news that Amazon.com, Berkshire Hathaway, and JPMorgan Chase were planning to cooperate in establishing a health care system for their U.S. employees. Financials fared better, helped by rising bond yields, which augur well for improved lending margins.
Some consolidation and profit-taking before the end of January appeared to be behind the declines, as was a climb in Treasury yields. The potential disruption in the health care sector also cast a wide shadow, as investors worried whether drug companies and health care service providers would see their profits slashed if Amazon brings its cost-cutting techniques to the sector.
The steep rise in bond yields—the yield on the 10-year Treasury note jumped to its highest level in about four years—corresponded with a sharp drop in bond prices. (Bond prices and yields move in opposite directions.) Municipal bond prices fell with Treasuries, but analysts noted that muni demand remains strong and easily able to absorb new supply.
Oil Price Under Pressure
High yield bonds experienced some weakness due to outflows from the asset class and lower commodity prices. Crude prices fell as the number of U.S. rigs drilling for oil reached the highest level since last August, suggesting that increased domestic output could impede further gains in oil prices. The stronger U.S. dollar also weighed on commodity prices. Many commodities are priced in U.S. dollars and become relatively more expensive on world markets—reducing demand—as the dollar appreciates.
European Stocks Fall as Growth reaches Decade High
A broad-based retreat pushed European equities lower for the week as key regional indexes, including Germany’s DAX 30, France’s CAC 40, and the pan-European STOXX Europe 600, posted losses. The UK’s blue chip FTSE 100 Index lost almost 3% for the week, its worst performance since November. A rise in bond yields, which tend to make stocks look relatively riskier, was one of the underlying reasons for the equity sell-off. Corporate earnings were generally solid, and many investors seemed to believe that stock markets were repricing given a strong January performance.
The economic recovery in the Europe Union (EU) continued to strengthen, as annual gross domestic product (GDP) rose to 2.5% in 2017—the strongest level in a decade—and EU growth outpaced both U.S. and UK GDP growth in 2017. Statistics agency Eurostat also noted that EU growth in the third quarter of 2017 was revised upward to 0.7% from 0.6%.
Stocks Record Massive Inflows, Bonds Sold Off
The Financial Times, citing weekly flow data by EPFR, reports that equity funds enjoyed their biggest monthly inflows on record in January, attracting about $100 billion. EPFR notes that $25.6 billion flocked into equity funds in the week ended January 31, lifting the month’s total above the prior record haul of $77 billion in January 2013. It added that exchange-traded funds (ETFs) dominated the inflows.
Eurozone government bonds, particularly in core countries, sold off this week, and yields climbed amid expectations of less accommodative monetary policy over the coming year. The yield on 10-year German bunds rose to 0.77% by the end of the week.
Japan’s Manufacturing Activity Hits 4 Year High
January’s final Markit/Nikkei Japan Manufacturing Purchasing Managers’ Index (PMI) reading stood at a seasonally adjusted 54.8, up from December’s final reading of 54.0. The index remained in expansion territory (above 50.0) for the 17th consecutive month. At the same time, rising commodity prices pushed up input costs, which spurred the fastest output price increases since October 2008.
Coupled with the manufacturing gains, Japanese exports rose 9.3% year-over-year to ¥7.3 trillion ($66.3 billion) in December, according to the Ministry of Finance. Exports to China increased 15.8%, and shipments to the entire Asia region expanded 9.9%, paced by sales of semiconductor production equipment and electronic parts. Although slightly below analysts’ forecasts and November’s 16.2% export growth, Wednesday’s release came the day after the Bank of Japan’s (BoJ) positive take on inflation expectations. The BoJ confirmed its conviction in the economic recovery and expressed confidence that inflation is gradually rising toward its 2% goal. Taken together, the data point to another quarter of gross domestic product growth—an eighth consecutive quarter of Japanese economic expansion.
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