The sale of stocks of technology and government debt continued on Tuesday in European markets as investors positioned themselves for rising inflation.
The Stoxx 600 across the region fell 1.5 percent by mid-morning in London. The technology inventory subsector fell 3.8 percent, its worst performance since October. This followed a rough session on Wall Street for the sector, which is one of the biggest winners of the recent ultra-loose monetary policy.
Investors are worried that faster price growth, as the global economy recovers from the pandemic, will force the Federal Reserve and other central banks to tighten policy sooner than planned. That would put pressure on reducing current estimates of developing companies, analysts warn. Bonds, whose coupons are being eroded by inflation, have fallen since the beginning of the year.
Germany’s 10-year debt yield rose an additional 0.04 percentage points to minus 0.31 percent on Tuesday as investors sold off debt. That yield reached its highest level since the rush to safety last March.
“The reality today is that inflation is a risk – yields on underlying government bonds are rising as markets turn into better future growth,” said Kerry Craig, global market strategist at JPMorgan Asset Management. “But some inflation may not be a bad thing, and recovery has a long way to go before it becomes a problem.”
The ten-year yield on the government debt of the United Kingdom increased by 0.03 percentage points to 0.7 percent. That is about 0.5 percentage points more than at the beginning of the year.
In American trade on Monday, The S&P 500 spilled 0.8 percent, while the technology-focused Nasdaq Composite fell 2.5 percent. Shares of Facebook, Amazon, Apple, Netflix and Google’s home alphabet have fallen, which some investors have suggested as the start of a belated correction.
That should continue on Tuesday. Futures for the U.S. blue-chip index S&P 500 were down 0.8 percent and for the Nasdaq 100 by 1.9 percent.
Nadège Dufossé, head of cross-asset strategy at the Candriam fund manager, said investors were “predicting the Fed’s response to rising inflation expectations”.
Federal Reserve Chairman Jay Powell is leaving before Congress on Tuesday and Wednesday to give his semi-annual reports on monetary policy. Investors are interested in any hints as to whether rising inflation could encourage the US Federal Reserve to move from its ultra-loose stance.
The treasury market, which also weakened significantly this year due to renewed economic confidence and inflation forecasts, was stable in initial trades on Tuesday, yielding a reference ten-year bond of 1.36 percent.
Traders will get another clue as to whether it will be concerns about inflation are justified on Friday, with the release of the latest official US inflation data.
Losses to London’s FTSE 100 energy bias were constrained by further rising oil and other commodity prices. Oil prices continued to rise, and Brent oil, the global benchmark, rose 0.8 percent to just under $ 66 a barrel.
Germany’s Xetra Dax, meanwhile, had less than 1.9 percent. Despite the release of a road map beyond the English blockade, the slower introduction of the Covid-19 vaccine on the continent continued to cloud market sentiment, strategists said.
“In continental Europe, investors are worried about the possibility of perennial blockades – what people fear is a shock to growth,” Dufossé said.
China’s CSI 300 stock index from Shanghai and Shenzhen lost another 0.3 percent, a day after the benchmark suffered the largest one-day decline for more than six months. The sell-off was fueled by concerns that the country’s rapid economic recovery from the Covid-19 pandemic could lead to the removal of political support for property prices.
Meanwhile, South Korea’s technology-focused Kospi index lost 0.3 percent. Markets in Japan were closed due to a national holiday.