Australian shares are set to fall sharply for a second straight day, after US tech stocks plummeted on concerns about when central banks might finally unwind their COVID-19 stimulus measures.
By 7:10am, ASX futures were down 1.2 per cent to 7,154 points.
The Australian dollar fell moderately to 72.4 US cents, as the greenback jumped to a 10-and-a-half month high.
Wall Street’s major indexes suffered heavy losses, with interest rate sensitive tech stocks weighed most heavily on the market as investors lost their risk appetite.
The Dow Jones index fell 1.6 per cent (to 34,300 points), the S&P 500 lost 2 per cent (to 4,353) and the Nasdaq Composite dropped 2.8 per cent (to 14,547).
It was the S&P index’s worst day since May, and the Nasdaq’s biggest one-day slump since March. Both indexes were on track for their largest monthly declines since September 2020.
Technology giants Facebook, Microsoft and Alphabet dropped by more than 3 per cent, while Amazon fell by more than 2 per cent.
Tech stocks usually fall when government bond yields are rising because they have higher valuations and are most reliant on future growth, which can be curtailed by higher interest rates.
On European markets, Germany’s DAX fell by 2.1 per cent, while Britain’s FTSE lost 0.5 per cent.
What triggered the selling?
Global share investors hit the “sell” button overnight after US bonds were sold off for a fourth straight day, which led to a rise in longer-term interest rates.
This led to the closely watched US 10-year yield (on Treasury bonds) spiking to a level not seen since mid-June — as less demand for bonds leads to higher borrowing costs for the government issuing those bonds.
The prospect of rising (short-term) cash rates and the risk of inflation proving less transitory than expected took two-year yields to 18-month highs.
US Federal Reserve policymakers last week projected that they were ready to raise rates in 2022 and that the bank was likely to begin reducing its massive bond purchases (currently at the rate of $US120 billion per month) as soon as November.
Traders were left wondering whether the declines were the start of a broader market pullback or just a blip.
“We’re at the crossroads here,” said Dennis Dick, a trader at Bright Trading LLC.
“It’s hard to say [if this pullback will continue] because every time we think here’s a correction, the market just rides the dip.”
The United States’ benchmark 10-year notes jumped above 1.54 per cent (up from yesterday’s 1.48 per cent).
“The sell-off on bond markets is related to markets reading recent statements from the Fed and the Bank of England as being more hawkish with a view to the timing of rate hikes,” said Sarah Hewin, senior economist at Standard Chartered Bank.
Gold prices hit a seven-week low on Tuesday, as the US dollar strengthened and US Treasury yields surged.
Spot gold dropped 0.9 per cent to $US1,733.94 an ounce.
On oil markets, Brent crude dipped, after topping $US80 per barrel for the first time in nearly three years, as a five-day rally ran out of steam.
Brent futures settled at $US78.15 per barrel, down 1.7 per cent.