The tech-led sell-off has continued so far in today’s session, while crude oil extended its gains and the US dollar advanced further – most notably against the pound. Sentiment was not bearish outright, but the tech sell-off is not going to appease the bulls on Wall Street when the markets open there later on.
Source: ThinkMarkets and TradingView.com
Europe's
Tech Stock Index, the iShares STOXX Europe 600 Technology ETF, fell about 5% by mid-day in London, with the benchmark European indices down more than 1% each. US
futures slid, led by the Nasdaq 100, although futures on Russell were down only marginally. Tech stocks are likely to bear the brunt of any correction we may see in the stock markets. This is because of concerns over their sky-high valuations at a time when fears over stagflation are on the rise and central banks are warning of rate hikes or reduction in asset purchases. If techs continue to melt down, this may cause sentiment to turn sour towards other risk assets that have so far remained relatively resilient.
Risk appetite could also be hurt by
contagion fears from Evergrande and the potential for weaker economic growth in the months ahead. It is worth watching
emerging markets closely as stagflation and as the strengthening US dollar increases the risks for fresh
currency crises in oil-consumer nations like India. We have already seen fresh record lows for the Turkish lira against the dollar after the CBRT’s surprise rate cut last week.
Yields on government bonds remain in focus after the 10-year US yield hit 1.50% the day before to reach its best level since June. Given that the US economy has evolved further since June and with surging energy prices increasing inflationary pressures, there is no reason why US yields cannot rise to a new high for the year above 1.75%. In Europe, bond yields rose further this morning, with the 10-year UK yields climbing above 1.00% to re-test last year’s high at 1.055% as investors fretted over stagflation – and higher interest rates. Governor of the Bank of England, Andrew Bailey, has not ruled out a rake hike before the end of this year, although equally, he has been less optimistic on the prospects of a stronger recovery.
Indeed, the
pound has plunged after the BoE Governor warned the UK economy is facing headwinds, saying it has “hard yards ahead” as it recovers from lockdown. Bailey assessed that the “switch of demand from goods to services, as Covid has faded in terms of its economic impact, has not taken place to date on the scale expected”. This implies that the BoE will not aggressively tighten its belt, even if inflationary pressures are increasing sharply.
In
commodities, energy prices have continued their upsurge, with
Brent crude surpassing $80 per barrel and
natural gas hitting new highs on the year. But as concerns over demand rises, the potential upside for oil could be limited from here, especially with the OPEC+ meeting coming up in the week ahead. The group might decide to bring oil back to the market quicker than their 400K barrels per day target. Meanwhile,
gold found no haven demand, as it once again fell amid rising yields and dollar.