US stocks suffer biggest loss since May as bond sell-off hits tech sector
The government bond sell-off that began last week on the prospect of higher interest rates ricocheted into the $51tn US stock market on Tuesday, weighing heavily on technology stocks.
The benchmark S&P 500 fell 2 per cent, its biggest loss since May as more than 85 per cent of the stocks in the index declined. The tech-heavy Nasdaq Composite slid 2.8 per cent, its largest fall since March, while Europe’s Stoxx 600 index closed 2.2 per cent lower.
Yields on government bonds, which move inversely to price, have risen dramatically since the Federal Reserve and Bank of England last week signalled that interest rate hikes may come sooner than expected in the face of persistently higher inflation.
The yield on the 10-year US Treasury note, which acts as a benchmark for borrowing costs for companies and households worldwide, rose 0.06 percentage points to 1.55 per cent, a level not seen since June. The UK 10-year gilt yield breached 1 per cent on Tuesday for the first time since March last year and was last up 0.04 points to 0.99 per cent.
“The last three or four days, the market has been trying to price in a faster Fed,” said Priya Misra, global head of rates strategy at TD Securities. “It’s a more hawkish message that’s making its way into the rates market. That’s why the long end has been leading the way.”
The move higher in yields has pummeled stocks, with losses centred in the tech sector. An index of non-profitable tech companies run by Goldman Sachs’ ended the day down 5 per cent.
Tech stocks have been particularly sensitive to moves in interest rates expectations because their valuations are tied to the company’s prospects for growth years into the future. If interest rates and inflation are both rising, investors are likely to mark down their views of how valuable that future growth will be.
“When bond rates go up it makes equities look less attractive, and particularly those whose dividend yields are very small, such as in the technology sector,” said Rebecca Chesworth, senior equities strategist at State Street Global Advisors’ SPDR ETF business.
Last week the Federal Reserve said it could easily move ahead with a reduction of its $120bn-a-month of bond purchases. The world’s most influential central bank also revealed that half its monetary policymakers expect the first post-pandemic interest rate rise in 2022.
A day later the Bank of England warned UK inflation could top 4 per cent into next year, sparking expectations it was moving closer to raising interest rates from record lows.
Testifying to Congress on Tuesday, Fed chair Jay Powell said supply side constraints that have kept headline US inflation above 5 per cent for three consecutive months were “larger and longer lasting than anticipated”.
Powell made these comments hours after Brent crude, the international oil benchmark, briefly traded above $80 a barrel for the first time since October 2018, driven higher by hurricanes curtailing US production and surging natural gas prices.
Worries about economic growth also hit stock prices and government bond yields. The US Conference Board’s consumer confidence index, published on Tuesday, hit a seven-month low in September. The study’s authors cited concerns about the highly infectious Delta variant of the coronavirus for the drop.
The dollar index, which measures the greenback against a basket of six rival currencies, reached its highest level since November. The British pound dropped 1.2 per cent against the dollar to purchase $1.354.
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