U.S. stocks suffered their biggest decline in two months on Monday, with technology shares falling sharply on the gloomy economic outlook and concerns that members of the Federal Reserve will take a hawkish tone at a symposium this week.
Wall Street’s benchmark S&P 500 fell 2.1 percent, its worst one-day drop since mid-June. There was a decline in all sectors, but technology stocks and cyclical consumer groups including Amazon and Tesla were hit hardest. The technology-dominated Nasdaq Composite index fell 2.5 percent.
Technology stocks that promise long-term growth are seen as particularly vulnerable to rising interest rates because higher interest rates reduce the relative value of earnings far into the future.
“Nasdaq is the epicenter of interest rate uncertainty in the stock market,”[ads1]; said Julian Howard, chief investment officer at GAM. “[The Fed] speaks up hawk, which makes the market quite nervous. The job is not done [on inflation].”
The Fed has already raised interest rates three times this year in an effort to bring inflation down from 40-year highs, but officials have stressed that the US central bank has further to go.
Although Monday’s stock market drop appeared to contrast with a strong third-quarter rally, investors have warned that the earlier gains were not evidence of a rise in investor optimism after a terrible start to the year.
“I’m not in this help rally. I think we will get more downside for the risk markets for the rest of the year, says Jamie Niven, senior fund manager at Candriam.
Fed Chairman Jay Powell is expected to reaffirm his commitment to aggressively raise interest rates at the central bank’s annual meeting in Jackson Hole, Wyoming this week.
Joost van Leenders, senior investment strategist at Van Lanschot Kempen, predicted Powell “[will] justify why they are raising interest rates so quickly and why they have to”.
Citigroup economist Andrew Hollenhorst said: “We continue to expect a relatively hawkish speech.”
The hawkish predictions were reflected in government bond markets, with the yield on the policy-sensitive 2-year government bond rising 0.06 percentage points to 3.32 percent. The 2-year yield has risen from below 1 per cent at the end of last year, and was around 2.5 per cent as recently as the end of May. The interest rate on the benchmark index for 10 years rose above 3 percent for the first time in a month.
Higher yields reflect lower prices, and traders said on Monday they saw a flurry of put option buying on financial futures – bets that the value of futures would fall.
John Brady, CEO of futures brokerage RJ O’Brien, said the bearish bets, including many expiring on Friday, were made to guard against a potential further selloff in the state market after the Jackson Hole summit.
In currency markets, the euro fell 0.9 percent against the dollar to $0.994, falling back below $1 for the second time this summer. It had hit parity with the dollar in July for the first time in two decades.
Concerns over possible Russian cuts in energy supplies sent European gas and power prices higher on Monday, adding to fears the continent could slide into recession.
The regional stock gauge Stoxx Europe 600 closed 1 percent lower, with Germany’s Dax down 2.3 percent.
The dollar index, which tracks the U.S. currency against a basket of peers and tends to rise in periods of uncertainty, rose 0.7 percent. The index has risen nearly 3 percent this month, returning near the two-decade high it hit in July.
Shares in Asia largely followed Wall Street lower on Tuesday morning, with Japan’s Topix down 1.1 percent and Australia’s S&P/ASX 200 down 0.5 percent. Hong Kong’s Hang Seng was flat.
On Monday, mainland China shares jumped after the People’s Bank of China cut its mortgage interest rate for the second time this year in a bid to support the debt-laden property sector.
Additional reporting by Eric Platt in New York and Hudson Lockett in Hong Kong