US technology stocks declined for the second day in a row on concerns that rising long-term interest rates would derail a historic surge in the share prices of fast-growing companies.
The technology-focused Nasdaq Composite fell 1.5 per cent while the blue-chip S&P 500 lost 0.5 per cent in New York. Wall Street high-flyers like Tesla, payments company Square and Zoom Video Communications all declined, along with larger tech groups including Apple, Amazon and Google’s parent Alphabet.
Tesla’s 4 per cent decline erased its gains since the start of the year.
The selling came on top of the Nasdaq Composite’s 2.5 per cent fall on Monday, which some investors suggested was the beginning of an overdue correction. The index is still up nearly 40 per cent over the past year.
The losses moderated as Jay Powell, Federal Reserve chairman, told the US Senate there was “hope for a return to more normal conditions” as the pandemic eases, while also signalling no change to the central bank’s easy monetary policies.
A flood of central bank stimulus to buttress the global economy against the coronavirus crisis last year pushed interest rates to historic lows, but improving growth prospects and rising inflation expectations has sparked a sell-off in government bonds from New York to London and Sydney.
Analysts have said the resulting higher yields could dent the appeal of quickly growing companies, given that they reduce 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.
The rotation away from faster-growing companies by investors weighed on many stocks that had benefited as consumers stayed home during the pandemic, with shares of treadmill and at-home-bike maker Peloton and Teladoc Health, a provider of virtual doctor’s visits, declining. Goldman’s US stay-at-home index slid 2 per cent.
“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,” Baluszynski added.
The US Treasury market stabilised on Tuesday as Powell spoke. The yield on the benchmark 10-year bond fell 0.01 percentage point to 1.35 per cent. Interest rate volatility had jumped ahead of his testimony, with the closely followed Move index hitting its highest level on Monday since November’s US election, according to Ice Data Services.
“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.”
European bonds had weakened ahead of Powell’s appearance. Germany’s 10-year debt yield rose another 0.02 percentage points on Tuesday to minus 0.32 per cent, as investors sold out of the debt.
The 10-year yield on UK government debt pushed up 0.04 percentage points to 0.72 per cent. That is about 0.5 percentage points higher than the start of the year.
London’s energy-biased FTSE 100 benchmark eked out a small 0.2 per cent gain as oil prices and other commodities hovered near recent highs. Brent crude, the global benchmark, climbed 0.3 per cent to $65.46 a barrel.
Germany’s Xetra Dax, meanwhile, was off 0.6 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.
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.