- It was a downbeat start to the week on Wall Street, with a sell-off in big Tech names.
- The S&P 500 dropped for a fifth consecutive day and is now below 3900.
- Concerns over rising yields are weighing and Fed commentary on this topic will be closely scrutinised this week.
It was a downbeat start to the week on Wall Street, with a sell-off in big Tech driving significant downside in the Nasdaq 100, which dropped 2.63% on the day, but also dragging the S&P 500 0.77% lower, its fifth consecutive day off losses that saw the major US index lose its grip on the 3900 level and drop as low as the 3870s.
The exact reasons behind the selling in big Tech names that saw Microsoft shares drop 2.68%, Alphabet shares drop 1.65%, Amazon shares drop 2.13%, Apple shares drop 2.98% and Tesla shares drop 8.55% are not clear. Heightened regulatory scrutiny is one potential factor; the FT reported over the weekend that the UK’s competition watchdog had warned big Tech names of incoming anti-trust probes and Facebook’s ongoing spat with Australia regarding the sharing of news across its platforms is not putting big Tech in a good light. Meanwhile, market commentators are also suggesting that rising rates are leading investors away from some of the more expensive growth names.
Meanwhile, the Dow gained 0.1% on the day amid a 4.42% surge in Disney shares to fresh record highs; the company is ramping up its local-language productions in Europe with commissions from France, German, Italy and the Netherlands included, and 50 original shows expected by 2024.
Stocks that stand to benefit from higher inflation did well, with the Energy Index (+3.47%) leading the way amid surging crude oil prices (WTI closed the session $2.25 higher above $61.50), but financials (amid higher yields), materials, real estate and industrials all doing well too. Tech was of course the big underperformer amid downside in major names, whilst consumer discretionary also faired badly, down over 2% due to the Tesla sell-off. Value stocks broadly outperformer growth stocks, as investors bet on economic reopening and the equal-weighted S&P 500 outperformed the market-cap-weighted index.
Driving the day
The US stock market’s five-day skid appears still to be being driven by concerns over the impact of rising US bond yields, with US 10-year reaching highs of close to 1.40% on Monday. Markets seem to be betting on higher inflation ahead (hence the rally in commodities and steepening of the UST curve), which in itself might not be a problem for stocks, but financial markets also now seem to be betting that this move higher in inflation will prompt an earlier monetary response from the Fed. Money markets now see a 70% chance that the Fed will hike interest rates by 25bps by the end of 2022 versus an assigned 50% probability of this happening at the end of last week.
Bullish forecasts and commentary on the state of the US economy from major US banks seems not be helping these expectations for a more hawkish than previously thought Fed; Credit Suisse said on Monday that they expect US GDP growth to run hotter than at any time in the past 35 years and business investment is to run twice as fast as the broad economy. Meanwhile, Bank of America raised its US GDP growth forecast for 2021 to 6.5% and its 2022 expectation to 5% on Monday, citing expectations for a larger stimulus package, better news surrounding the Covid-19 pandemic and recent encouraging economic data. On the former, Congress is moving ever close to passing US President Joe Biden’s $19T stimulus package into law and members of Congress also now seem to be turning their attentions towards a broad infrastructure investment package that could be as much as $3T (aspects of which seem to enjoy broad bipartisan support).
Reynolds Strategy’s Brian Reynolds said, speaking about the concerns driving the recent pullback in stocks, “people are making mountains of out molehills”. Reynolds pointed out that junk bond yields hit all-time lows last week, which might suggest there has been a shift from the safety of Treasuries to the riskiness of corporate debt. “That's bullish for stocks” Reynolds concluded.
Looking ahead, stock markets will be focused on comments from Fed Chair Jerome Powell in his semi-annual testimony to Congress on Tuesday at 15:00GMT. Powell will also be speaking at 15:00GMT on Wednesday, but this will be a copy and paste of Tuesday’s remarks. The Fed Chair is likely to reiterate his recent dovish remarks regarding the fact that the Fed will only start to lift interest rates once it has met its 2% average inflation target and the US economy has reached full employment and that the bank’s QE programme will only be withdrawn once “substantial” progress has been made towards the bank’s inflation and employment goals.
The market’s main focus will be on what Powell says about the recent rise in US bond yields. Last week, influential FOMC member and NY Fed President John Williams said that the recent rise is not a concern, given the rise in yields is being driven by positives such as expectations for higher US economic growth and inflation. Powell is likely to say something similar and this might be taken as a “green light” for yields to move even higher (this could weigh on stocks).
Some analysts think there is an outside chance that he might attempt to jawbone yields lower, by reminding markets that the Fed maintains the option of tweaking or even expanding its QE programme. This would likely dampen yields and could be a stock positive.
Note that Fed Vice Chair Richard Clarida (seen as the economic brains of the Fed, given that Clarida is an actual economist while Powell is, by trade, a lawyer) is also speaking on Wednesday at 21:00GMT.
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