Inflation will remain problematic: Research strategist
Futures tracking the Nasdaq 100 Index slid as much as 2.1 per cent, after U.S. Treasury yields climbed on growing bets that the U.S. Federal Reserve will hike interest rates in March to quell rising inflation.
The move adds to the 4.3 per cent drop in Nasdaq 100 so far in 2022. March contracts for the S&P 500 index and blue-chip Dow Jones Industrial Average were down 1.3 per cent and 0.9 per cent, respectively, as of 9:37 a.m. in London. The Stoxx Europe 600 dropped 1.3 per cent with technology stocks leading losses.
Treasuries slumped across the curve, with the two-year U.S. yield climbing past one per cent for the first time since 2020. The selloff came as Brent oil prices surged to the highest level in seven years.
"Investors fled bond markets, driving yields to new highs as the Fed’s switch, the spread of the omicron strain and the upcoming corporate results keep denting market sentiment,” Pierre Veyret, a technical analyst at ActivTrades, said.
“Volatility is likely to stay high today, and market directionality is unlikely to be registered prior to any major macro development. Investors will adopt a cautious approach, monitoring benchmark reaction over their major technical supports.”
Higher interest rates mean a bigger discount for the present value of future profits, hurting growth stocks with the highest valuations, including technology, and boosting cheap or so-called value shares.
The advance of the Omicron virus strain and the start of the earnings season have added to caution toward equities.
Investors are looking for signs that companies can sustain profit growth despite rising risks from inflation, interest rates, supply chain bottlenecks and slowing economic growth following last year’s blockbuster earnings. U.S. markets were closed Monday for Martin Luther King Jr. Day.
“After coming back from the holiday, markets will continue to price for a more aggressive rate-hike path from the Fed, with the absence of comments from Fed officials and a relatively quiet U.S. economic calendar providing little catalyst to guide sentiment,” said Jun Rong Yeap, a market strategist at IG Asia Pte.