US technology stocks fell sharply for the second day in a row on concerns rising long-term interest rates will derail a historic surge in the share prices of fast-growing companies.
The technology-focused Nasdaq Composite fell 3 per cent in early trading, while the blue-chip S&P 500 lost more than 1 per cent. Wall Street high-flyers like Tesla, payments company Square and Zoom Video Communications all declined. Larger tech groups including Apple, Amazon and Google parent Alphabet also lost ground.
The renewed selling came after the Nasdaq Composite fell 2.5 per cent on Monday in what some investors suggested was the beginning of an overdue correction. The index is still up 40 per cent over the past year.
European tech shares also sold off on Tuesday, with the regional Stoxx 600 tech index sliding 3.8 per cent in its worst fall since October.
A flood of central bank stimulus to buttress the world economy against the coronavirus crisis last year pushed interest rates to historic lows. Those low borrowing costs were seen as central pillar of the big rally in technology stocks, which have also benefited because their products and services have been in demand throughout the pandemic.
With improving growth prospects and rising inflation expectations sparking a sell-off in government bonds from New York to London and Sydney, investors have begun to reassess how much further the tech rally can go. In particular, analysts have said higher yields could dent the appeal of quickly growing companies given that it reduces the present value of future profits.
“Yesterday’s sell-off is just [the] market adjusting for a possible pick-up in inflation and higher rates,” said Artur Baluszynski, managing director at Henderson Rowe.
“Growth stocks, which are now largely concentrated in the tech sector, tend to be more sensitive to interest rate movement than, for example, value stocks. Try to increase the discount rate, and the valuation adjustment could be quite brutal, especially for narrative-driven stocks with negative cash flows,” he added.
However, some analysts saw the increase in bond yields as a sign of economic normalisation.
“We’re in a recovery,” said Samy Chaar, chief economist at Lombard Odier. “Technically Asia and the US excited a recession in the third quarter of last year, and in a recovery bond yields creep up and we see a rotation into cyclicals, investors are adjusting their portfolios.”
Investors said they were looking ahead to Federal Reserve chair Jay Powell’s testimony before Congress later on Tuesday for a hint of how concerned the central bank is over rising bond yields.
The Treasury market, which has also weakened considerably this year on renewed economic confidence and inflation forecasts, was stable in early trades on Tuesday, with the yield on the benchmark 10-year bond at 1.36 per cent. However, European bonds were under pressure ahead of Powell’s appearance.
Germany’s 10-year debt yield rose another 0.04 percentage points on Tuesday to minus 0.30 per cent, as investors sold out of the debt. That took yields to their highest since the rush to safety in March last year.
“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.
Elsewhere, 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 0.2 per cent to $65.41.
Germany’s Xetra Dax, meanwhile, was off 1.4 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.