Nasdaq continues to fall as US stocks sell off

Investing

Stocks on Wall Street slid on Thursday with the tech-heavy Nasdaq Composite taking its losses from its record high to near 13 per cent as the prospect of higher interest rates has driven investors out of equities.

The Nasdaq index ended the day down 1.3 per cent. It has now fallen 12.7 per cent from a record struck in November. The index earlier this week fell into a technical correction. This occurs when it falls more than 10 per cent from a high.

The blue-chip S&P 500 stock index fell 1.1 per cent on Thursday, and now sits 7 per cent below a high set this month.

Among the stocks that had the biggest losses was fitness equipment maker Peloton, dropping 24 per cent as CNBC reported it would temporarily stop manufacturing new bikes and treadmills because of waning demand. Shares of Netflix also fell in after-hours trading, sliding 13 per cent after the company said subscriber growth would fall short of Wall Street expectations.

US stocks have been under pressure since the start of the year, as investors bet that in order to combat inflation the Federal Reserve will need to raise interest rates at a faster pace and by a larger magnitude than previously anticipated.

Line chart of Year-to-date performance (%) showing US stocks slide further as sell-off accelerates

Higher interest rates increase the cost of borrowing for companies, which can be problematic for lossmaking groups who don’t yet have the margins to absorb rising rates.

But there is another issue for many of the lossmaking but fast-growing companies in the tech industry. Valuations across the sector have been bolstered by low and negative yields on Treasuries, which are used by investors to value profits that will not be generated for many years to come. As yields on Treasuries rise, the relative appeal of those future profits decline, which in turn weighs on investor demand for shares of those companies.

A closely followed Goldman Sachs index of lossmaking tech groups has fallen 18 per cent so far this year.

Minutes of the US central bank’s December meeting released in early January revealed its officials had become more willing to raise borrowing costs. The futures market is currently pricing in four quarter-point rate increases this year, with the first expected in March.

At its two-day policy meeting next week, the central bank may also provide an update on plans to shrink its $9tn balance sheet and the ongoing taper of purchases of Treasuries and mortgage-backed bonds.

“I don’t necessarily think the worst is over (for equities) . . . I do think that the Fed is going to accelerate tapering next week,” said Andy Brenner, head of international fixed income at NatAlliance Securities.

In government debt markets, the yield on the 10-year Treasury note, which underpins global borrowing costs and equity valuations, fell 0.05 percentage points to 1.82 per cent. The two-year yield, which closely tracks monetary policy expectations, fell 0.02 percentage points to 1.04 per cent. Yields fall when prices rise.

European stock markets wavered on Thursday, with the regional Stoxx 600 index ultimately closing 0.5 per cent higher.

The Nasdaq Golden Dragon index, a collection of US-listed Chinese companies, added 2.2 per cent on Thursday after China cut its one- and five-year loan prime rates. That will ease funding costs for mortgage borrowers and small businesses as the nation’s economic growth has decelerated to its slowest pace in 18 months.

The move by Beijing also soothed market nerves that had been building ahead of the Fed’s monthly meeting next week.

Hong Kong’s Hang Seng index rose 3.4 per cent in response to China’s loan rate cuts. Tokyo’s Nikkei 225 index closed 1.1 per cent higher.

“Markets have pulled back quite violently,” said Axel Botte, strategist at fund management group Ostrum. “Developments in China are therefore helpful and a stabilising force globally.”

Brent crude, the international oil benchmark, settled roughly flat at $88.38 a barrel after hitting its highest level since 2014 earlier in the day.

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