A market decline led by tech shares continued on Wall Street and in Europe on Thursday, as investors cut market risk in response to the US central bank signalling a swift end to its pandemic-era monetary stimulus.
Wall Street’s technology-heavy Nasdaq Composite share index, which dropped 3.3 per cent on Wednesday in its worst session since February 2021, was down 1 per cent in mid-morning dealings.
The blue-chip S&P 500 index slid 0.5 per cent lower, as the benchmark’s information technology sub-index dropped 1 per cent.
In Europe, the regional Stoxx 600 equity gauge fell 1.6 per cent, as government bond prices also fell worldwide.
The moves came after minutes from the Fed’s latest meeting revealed that officials at the central bank, which has boosted financial markets since March 2020 with a huge bond-buying programme and record-low interest rates, broadly agreed it was time to accelerate the withdrawal of this support.
“Markets are awakening to the end of easy money,” said Olivier Marciot, cross-asset investment manager at Unigestion.
“We have had a lot of quantitative easing and monetary support, which creates an environment where all assets tend to thrive, and when you remove that it is the reverse,” he added.
US energy and banking stocks rose on Thursday, however, as some investors took the Fed’s hawkish shift as a vote of confidence in the US economy.
“The companies that are more sensitive to the economic cycle are the ones the market will reward,” said Fahad Kamal, chief investment officer at Kleinwort Hambros.
The Fed minutes also revealed the world’s most influential central bank may need to raise interest rates “sooner or at a faster pace” than officials had initially anticipated to tame soaring inflation.
Prospects of higher inflation and interest rates raise the opportunity cost of owning shares, which investors value according to their expected future profits and dividend streams, in an effect that is most magnified for early stage or speculative companies in sectors such as tech.
The Fed’s minutes also indicated its officials would begin debating how to shrink the central bank’s balance sheet, which has more than doubled in size to less than $9tn since early 2020 as it aggressively increased its holdings of Treasuries and mortgage-backed securities.
The yield on the benchmark 10-year US Treasury, which rises as prices of the government debt instrument falls, added 0.04 percentage points to 1.74 per cent. This key debt yield that influences borrowing costs and asset valuations worldwide, has climbed from about 1.63 per cent at the start of this week.
European government bonds were swept up in the post-Fed sell-off. Germany’s 10-year bond yield rose to minus 0.05 per cent, its highest level since May 2019. Riskier eurozone debt was also hit, with Italy’s 10-year yield climbing above 1.3 per cent for the first time since July 2020.
In Asia, Japan’s Nikkei 225 closed about 2.9 per cent lower and mainland China’s CSI 300 fell 1 per cent. Hong Kong’s Hang Seng index rose 0.7 per cent, however, as heavy declines for Chinese technology stocks went into reverse.
Additional reporting by Tommy Stubbington
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