The prospect of the world’s major central banks moving more aggressively to stamp out inflation shook financial markets on Tuesday, with Wall Street stocks suffering their biggest loss in a day in nearly five months.
The benchmark S&P 500 index fell 2 percent, its biggest loss since May, as more than 85 percent of the index’s stocks fell. The high-tech Nasdaq Composite fell 2.8%, its biggest drop since March, while Europe’s Stoxx 600 Index closed 2.2% lower.
The stock market sell-off was fueled by continued falling Treasury prices as investors reposition themselves on the prospect of more aggressive central bank policy.
Government bond yields, which move in reverse of prices, have risen dramatically since officials at the Federal Reserve and the Bank of England signaled last week that interest rate hikes could come before than expected due to persistently higher inflation.
“For the last three or four days, the market has been trying to price in a faster Fed,” said Priya Misra, TD Securities’ global director of rates strategy. “It is a more aggressive message that is making its way into the rate market.”
The five-year Treasury yield, which moves with interest rate forecasts, hit its highest level in more than a year on Tuesday, a clear sign that investors were beginning to worry about higher inflation. and slower growth.
Concerns about rising prices were compounded by a sharp rise in commodity prices, with Brent crude, the international benchmark for oil, briefly trading above $ 80 a barrel for the first time since October 2018, fueled by hurricanes that reduced US production and rising natural gas prices.
The yield on the 10-year US Treasury bond, which acts as a benchmark for borrowing costs for businesses and households worldwide, rose 0.06 percentage points to 1.55%, a level not seen since June. And the UK 10-year gilt’s yield briefly topped 1% for the first time since March last year.
The movement in yields has hit equities, with losses focused on the tech sector, many of which have borrowed at low rates to fuel growth. An index of nonprofit tech companies led by Goldman Sachs ended the day down 5 percent.
Tech stocks have been particularly sensitive to movements in interest rate expectations because their valuations are tied to the company’s future growth prospects. If interest rates and inflation are rising, investors are likely to lower their views on how valuable future growth will be.
“When bond rates go up, stocks look less attractive, and particularly those with very small dividend yields, such as in the technology sector,” said Rebecca Chesworth, senior equity strategist in the SPDR ETF business. from State Street Global Advisors.
Last week, the Fed said it could easily move forward with a reduction in its bond purchases of $120 billion a month. The world’s most influential central bank also revealed that half of its policymakers expect the first post-pandemic interest rate hike in 2022.
Testifying before Congress on Tuesday, Fed Chairman Jay Powell said that the supply-side restrictions that have kept headline inflation in the United States above 5 percent for three consecutive months were “bigger and more durable than anticipated. “
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Market measures of inflation expectations have risen in recent days, but on Tuesday the most notable move was in real rates: Treasury yields stripped of the effects of inflation.
The 10-year real yield rose 0.03 percentage points to minus 0.86 percent, its highest level since June, reflecting the change in the way investors perceive that changes in Fed policy will reduce inflation.
The US Conference Board consumer confidence index, released Tuesday, hit a seven-month low in September. The study authors cited concerns about the highly infectious Delta variant of the coronavirus for the fall.
The dollar index, which measures the dollar against a basket of six rival currencies, reached its highest level since November. The British pound fell 1.2% against the dollar to buy $ 1,354.