Equity markets declined over the past week, with the S&P/ASX 300 down -3.3% and the MSCI World Ex Australia index falling 2.7% in local terms, but only -0.9% in Australian Dollar terms for the unhedged Australian investor. Most of the falls happened overnight as a higher-than-expected GDP number put upward pressure on short-term rates. Meanwhile, long-term rates actually fell, implying that the market has started to assign a higher probability to a scenario where the Fed is forced to raise rates to a level that eventually dampens growth and inflation to a greater extent. Or something in the financial system breaks with the same effects.  Emerging markets held up better, with the MSCI Emerging Markets index declining -1.5%, and only slightly less in local currency terms, as the Australian Dollar really only appreciated against the US Dollar.

In Australia, the relative underperformance of small-cap stocks continued, with the S&P/ASX Small Ordinaries index dropping -5% compared to the -3.3% fall in the S&P/ASX 300 index. Most sectors were down, with healthcare, consumer discretionary and IT the worst performers, and utilities the only exception. Later in the week a higher-than-expected CPI print also weighed on the market and put more upward pressure on rates.

The biggest detractors to the Australian index included Commonwealth Bank, Westpac, NAB and ANZ, which collectively accounted for about a third of the market's fall, amid worries that higher interest rates might cause issues in the housing market. Major mining names like BHP and Rio provided some offset. Gold miners were standout performers, as the gold price rallied 7.4% for the week.

Internationally, US large-cap tech stocks again weighed on global equity returns. Meta Platforms fell -3%, dragging the index down while other mega-cap tech names like Apple, Amazon, Alphabet and Nvidia are also down sharply this week.

Microsoft was a rare tech outperformer, gaining over 4% after reporting better-than-expected earnings results which contrasted with Alphabet (Google), which fell -7.4%. Both companies reported strong and better-than-expected earnings, the difference was that more of Microsoft's increased earnings came from the cloud computing that AI services are consuming so voraciously. And this is what the market remains obsessed with.

Most large companies have exceeded expectations, including a host of industrials, but the biggest numbers came from the large tech companies. Most of them finished the week down due to concerns over higher for longer interest rates and their already high valuations. Meta, for instance, beat expectations by some 20% (and it was already a big, expected number), but ended the week down, with a lawsuit over exploitative social media tactics also looming.      

Looking across asset classes, global government bonds held up relatively well as equities fell overall, although there were wild swings in prices. A 0.2% change for long-term rates doesn’t sound like much, but it does entail relatively large changes in bond prices and even more for stocks with long-duration cash flows. Credit spreads widened slightly. Gold was the best-performing asset globally, rallying over 7% on safe-haven demand. Overall, it was a risk-off week for markets on concerns over corporate earnings and rising interest rates.

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