The prospect of the world’s major central banks acting more aggressively to stamp out inflation rocked financial markets on Tuesday, with Wall Street stocks suffering their biggest one-day loss in nearly five months.
The benchmark S&P 500 index fell 2%, its biggest loss since May, as more than 85% of stocks in the index fell. The tech-rich Nasdaq Composite slipped 2.8%, its biggest drop since March, while the European Stoxx 600 index closed down 2.2%.
The stock market sell-off has been fueled by the continued decline in Treasury prices as investors reposition themselves in anticipation of a more hawkish policy from the central bank.
Yields on government bonds, which move in the opposite direction of prices, have risen significantly since policymakers at the Federal Reserve and the Bank of England signaled last week that interest rate hikes could come more sooner than expected in the face of ever higher inflation.
“Over the past three or four days, the market has been trying to price a faster Fed,” said Priya Misra, global head of rate strategy at TD Securities. “It’s a more hawkish message making its way into the rate market.”
The five-year Treasury yield, which moves with interest rate expectations, hit its highest level in more than a year on Tuesday, a clear sign that investors were starting to worry about higher inflation and slower growth.
Worries about rising prices were compounded by a sharp rise in commodity prices as Brent crude, the international benchmark for oil, briefly traded above $ 80 a barrel for the first time since October 2018 , pushed up by hurricanes reducing US production and soaring natural gas prices.
The yield on the 10-year US Treasury bill, which serves as the benchmark for borrowing costs for businesses and households around the world, rose 0.06 percentage point to 1.55%, a level not seen since June. And the yield on UK 10-year gilts briefly exceeded 1% for the first time since March of last year.
Movements in yields have bludgeoned stocks, with losses centered on the tech sector, many of which have borrowed at cheap rates to fuel growth. An index of nonprofit tech companies led by Goldman Sachs ended the day down 5%.
Tech stocks have been particularly sensitive to changes in interest rate expectations, as their valuations are tied to the company’s growth prospects in the coming years. If interest rates and inflation both rise, investors are likely to note their views on the value of that future growth.
“When bond rates rise, stocks look less attractive, and especially those with very low dividend yields, such as in the tech sector,” said Rebecca Chesworth, senior equity strategist at State Street Global Advisors’ SPDR ETF.
Last week, the Fed said it could easily go ahead with cutting its $ 120 billion monthly bond purchases. The world’s most influential central bank also revealed that half of its monetary policy makers expect the first post-pandemic interest rate hike in 2022.
A day later, the Bank of England warned that UK inflation could exceed 4% next year, raising expectations it was approaching an interest rate hike from record highs.
Testifying before Congress on Tuesday, Fed Chairman Jay Powell said the supply-side constraints that kept US inflation above 5% for three consecutive months were “larger and longer lasting provided that”.
Market measures of inflation expectations have risen in recent days, but the most notable move on Tuesday was in real rates – Treasury yields stripped of the effects of inflation. The 10-year real yield rose 0.03 percentage point to minus 0.86 percent, its highest level since June, reflecting the shift in how investors perceive changes in Fed policy to soften inflation.
The US Conference Board’s consumer confidence index, released on Tuesday, hit a seven-month low in September. The authors of the study raised concerns about the highly infectious Delta variant of the coronavirus for gout.
The dollar index, which measures the greenback against a basket of six rival currencies, hit its highest level since November. The British pound fell 1.2 percent against the dollar to buy $ 1.354.
Not covered – Markets, finance and strong opinion
Robert Armstrong dissects the most important market trends and explains how the best minds on Wall Street are reacting to them. Sign up here to receive the newsletter directly to your inbox every day of the week