Wall Street stocks joined a global equities slide, with technology shares sustaining the biggest blows over concerns that rising inflation will prompt central banks to tighten monetary policy.
The Nasdaq Composite index, whose largest constituents include big tech companies Apple, Amazon, Facebook and Tesla, opened 2.1 per cent lower and was on course for a second day of heavy losses that would take its drop so far this month to 6 per cent.
The broader-based S&P 500 index fell 1.3 per cent.
Concerns have flared that sustained high inflation could force the Federal Reserve to reduce its $120 billion (€98 billion) of monthly bond purchases that have boosted financial assets since last March.
Expectations
The US five-year break-even rate, an important measure of market expectations for price growth, hit 2.733 per cent on Tuesday, heading for its highest closing level since 2006, Bloomberg data show.
A move by the Fed could mark the end of the equities rally, analysts say. The most richly valued stocks, such as those of big US tech groups, are viewed as the most vulnerable to a correction.
“Inflation is creating a lot of fear among investors because of the possibility that the central banks are not ready to deal with it,” said Aneeka Gupta, research director at WisdomTree.
Data to be published on Wednesday is expected to show headline consumer prices in the US rose 3.6 per cent in April from the same month last year. Fed chair Jay Powell has said the central bank will tolerate short bursts of higher prices to support the economic recovery.
“But we could get to the point where the Fed and other central banks suddenly have to do something about inflation and they could move faster than they have so far indicated that they will,” Ms Gupta said.
Europe’s Stoxx 600 index dropped 2.4 per cent with its tech sub-index down 3.3 per cent. Futures markets indicated the rout would extend into the Asia Pacific region on Wednesday morning after Tokyo’s Topix fell more than 3 per cent on Tuesday.
Growth
Price growth is being fuelled by a global computer chip shortage and a boom in the price of commodities from steelmaking ingredient iron ore to lumber.
The spectre of cost pressures was amplified on Tuesday by data showing Chinese factory gate prices, an indicator of what domestic consumers and western importers will pay for goods, rose to a three-year high of 6.8 per cent last month, year on year.
The US five-year break-even rate, an important measure of market expectations for price growth, hit 2.733 per cent on Tuesday, heading for its highest closing level since 2006, Bloomberg data show.
Meanwhile, mentions of “inflation” among executives in Wall Street corporate earnings conference calls are near a record high struck a decade ago, with many companies planning to pass on higher costs by raising prices, according to Bank of America.
The Vix, an index of expected volatility on the S&P 500 dubbed Wall Street’s “fear gauge”, rose to a reading of almost 22, its highest level since late March.
The yield on the benchmark 10-year US Treasury bond was little changed at 1.61 per cent on Tuesday.
However, it has climbed from about 0.9 per cent at the start of the year as traders bet on a longer-term inflationary trend that would erode the returns on such fixed-income securities.
Shares
Higher Treasury yields also dent the value of companies’ future cash flows, something that is particularly punishing shares in tech and other growth businesses whose profits may not peak for decades.
Strong moves out of such shares have already caused the value of Cathie Wood’s flagship Ark innovation fund to tumble by about a third from its February high. Ark holdings such as Tesla, which led the way higher during last year’s big equities rally, have pulled back sharply.
Not all analysts are bearish about equities and inflation.
“We think inflation fears are overdone and much of it will be transitory,” said Fahad Kamal, chief investment officer at private bank Kleinwort Hambros.
“The economic picture is robust, which is translating into huge bumper earnings growth for companies.” – Copyright The Financial Times Limited 2021
