A sell-off in tech stocks and government debt continued in European markets on Tuesday as investors positioned for rising inflation.
The region-wide Stoxx 600 fell 1.5 per cent by mid-morning in London. A subsector of technology stocks was down 3.8 per cent, its worst performance since October. That followed a rough session on Wall Street for the sector, which has been one of the big winners of recent ultra-loose monetary policy.
Investors are concerned that faster price rises, as the global economy recovers from the pandemic, will force the Federal Reserve and other central banks to tighten policy sooner than planned. That would exert downward pressure on growth companies’ present valuations, analysts warn. Bonds, whose coupons are eroded by inflation, have slumped since the start of the year.
Germany’s 10-year debt yield rose another 0.04 percentage points on Tuesday to minus 0.31 per cent, as investors sold out of the debt. That took yields to their highest since the rush to safety last March.
“The reality today is that inflation is a risk — core government bond yields are rising as markets reprice for better future growth,” said Kerry Craig, a global market strategist at JPMorgan Asset Management. “But some inflation may not be a bad thing, and the recovery has a long way to go before it becomes a problem.”
The 10-year yield on UK government debt pushed up 0.03 percentage points to 0.7 per cent. That is about 0.5 percentage points higher than the start of the year.
In US trading on Monday, the S&P 500 shed 0.8 per cent while the tech-focused Nasdaq Composite tumbled 2.5 per cent. Shares of Facebook, Amazon, Apple, Netflix and Google parent Alphabet all fell in what some investors suggested was the beginning of an overdue correction.
That was poised to continue on Tuesday. Futures for the US blue-chip S&P 500 index were off 0.8 per cent, and those for the Nasdaq 100 fell 1.9 per cent.
Nadège Dufossé, head of cross-asset strategy at fund manager Candriam, said investors were “anticipating the Fed’s reaction to an increase in inflation expectations”.
Federal Reserve chair Jay Powell goes before Congress on Tuesday and Wednesday to give his semi-annual update on monetary policy. Investors are keen for any hints on whether rising inflation could push the US central bank to shift from its ultra-loose stance.
The Treasury market, which has also weakened considerably this year on renewed economic confidence and inflation predictions, was stable in early trades on Tuesday, with the yield on the benchmark 10-year bond at 1.36 per cent.
Traders will get another clue on whether those inflation concerns are justified on Friday, with the release of the latest official US inflation data.
Losses for London’s energy-biased FTSE 100 benchmark were limited by further gains in oil prices and other commodities. Oil prices continued to rise, with Brent crude, the global benchmark, up 0.8 per cent to just below $66 a barrel.
Germany’s Xetra Dax, meanwhile, was off 1.9 per cent. Despite Monday’s release of a road map out of England’s lockdown, the slower rollout of Covid-19 vaccines on the continent continued to cloud market sentiment, said strategists.
“In mainland Europe, investors are worried about the prospect of multiyear lockdowns — what people fear is a shock to growth,” said Dufossé.
China’s CSI 300 index of Shanghai and Shenzhen-listed stocks lost another 0.3 per cent, a day after the benchmark suffered its biggest one-day drop in more than six months. The sell-off was prompted by concerns that the country’s rapid economic recovery from the Covid-19 pandemic could bring on the removal of policy support for asset prices.
Meanwhile, South Korea’s tech-focused Kospi index lost 0.3 per cent. Markets in Japan were closed for a national holiday.