Both American and European futures are trading at lower levels today after the Nasdaq, the tech-heavy index, slumped in yesterday’s session. The drop in the Nasdaq was because of a broader selloff of technology stocks as treasury yields climbed, due to Fed Chair Jerome Powell’s nomination by President Biden earlier this week. Because of surging yields, investors are shifting away from growth companies to companies that are more positively correlated with expansion, such as financial and energy firms.
In yesterday’s session, the Dow Jones Industrial Average surged 0.55%, while the S&P 500 index hopped 0.17%. The Nasdaq slumped 0.50%.
Today, investors will be flushed with a variety of economic data reports, including an update on GDP, information on consumer confidence, declaration of weekly unemployment claims, and the release of Federal Reserve FOMC minutes.
Investors should understand that the main reason for the tech selloff is a rise in treasury yields, and these yields are surging due to the Fed’s more hawkish stance, as evidenced by Chair Powell’s nomination. This move was most likely interpreted by Treasury markets as an indication of a faster-than-expected rise in interest rates.
Hence, when interest rates rise, the coupon rates associated with treasury notes become unattractive to traders. To cater to this, prices of treasury notes fall, pushing yields up. When yields and interest rates rise, valuations of technology companies take a hit, as their valuations are more dependent on the growth of future cash flows. This is exactly what we have seen over the past few days, prompting investors to shift to sectors linked to economic reopening. However, Jerome Powell himself is trying to communicate a balance between boosting economic growth while keeping inflation in check.
Moving forwards, the biggest risk to stock markets is the resurgence of coronavirus cases in Europe, which has supported the rise of tech stocks recently. In the European region, deaths caused by the deadly virus will likely reach 2.2 million by March 2022 if we continue with the current trend. Covid-19 cases in the U.S. are also on the rise, and the culprits behind the spike are individuals who refuse to get vaccinated, putting massive pressure on hospitals. The sixth wave, until now, has affected Michigan severely, which has nearly 600 cases per 100,000 individuals. This number should be an eye opener for American authorities as it is thrice the national average of COVID-19 cases.
Yesterday, investors went through a slew of PMI reports from Europe, the United Kingdom, and the United States of America. Data from Europe came in stronger than expected, hopping from 54.2 in October to 55.8 in November. The expected number was 54.2. Any reading above 50.0 indicates an expansion of the economy. Although the numbers have improved, over the next few weeks, if not months, the European economy is expected to slow down because of the implementation of COVID-19 related restrictions.
Similarly, PMI reports from the United Kingdom also outperformed projections and rose from 57.8 in October to 58.2 this month. The expected reading was 57.3. On the other hand, economic activity in the United States slowed down because of supply chain bottlenecks and shortages of labour. The PMI index for the U.S. slumped from 57.6 in October to 56.5 this month.
Yesterday, we also witnessed the Turkish Lira depreciating to unprecedented lows. At one time, one dollar was equal to 13.44 liras, surpassing its resistance of 11 liras per dollar. The drop in the value of the Turkish Lira is shocking because not too long ago, in 2019, one U.S. dollar was equal to 5.6 liras.
The drop in the value of Turkey’s legal tender was because of President Recep Tayyip Erdogan’s insistence on keeping his nation’s interest rates low despite an uncontrolled rise in consumer prices. Turkey’s rise in consumer prices is nearly 20%, which means that the purchasing power of Turkish citizens has drastically dropped.
Stocks of companies that are more allied to speculation have shed value over the last few days, and the price action of digital coins has not been immune to this phenomenon. In the last 100 days, the correlation between the S&P 500 and Bitcoin has risen to 0.33, implying that when the S&P 500 falls in value, Bitcoin will likely fall in value as well, and vice versa. Hence, the recent selling spree in crypto markets is tied to investors’ moving away from risky assets and growth stocks to safer investments until there is some stability in financial markets, not just in the United States but across the globe.
Investors should note that over the past few months, and with the winter season finally here, governments around the world have been trying to raise oil supply to curb the persistent rise in fuel prices. Attempting to do just this, the United States is now considering utilising its strategic petroleum reserves (SPRs) because of which oil prices did decline on Monday. However, on Tuesday, oil prices resurged because, although the scale of the release seems to be significant, the majority of the crude oil to be released will be borrowed and hence will have to be returned down the line. Thus, this route will likely only be a temporary solution.
Prices of the yellow metal have been on a declining trajectory as treasury yields continue to rise. To counter record high inflation, investors expect that the Federal Reserve will likely move to a more contractionary monetary policy, meaning a likely surge in interest rates is not too far away. A rise in interest rates increases the opportunity cost of holding the precious metal and makes holding gold less appealing to investors. However, investors should keep in mind that despite a hawkish Fed, inflation is still rising, and the coronavirus continues to spread, meaning gold prices could jump moving forward.
Asian Pacific Markets
According to recent reports, the Singaporean economy grew faster than projected in the third quarter of 2021. The GDP expanded at a rate of nearly 7%, while the projected growth was 6.5%. Singapore’s economic growth was fuelled by economic reopening from historical lockdowns put in place in response to the coronavirus pandemic.
As of 12.20 a.m. EST, the Nikkei dropped 1.82%, and the Shanghai index slumped 0.10%. The Hang Seng index, in Hong Kong, dipped 0.06%. The ASX 200 index fell 0.04%, and the Seoul Kospi declined 0.44%.