(Bloomberg) — U.S. equities fell Thursday as investors resumed bets tighter monetary policy from the Federal Reserve would crimp richly valued technology stocks.
The S&P 500 slid 0.4% while the tech-heavy Nasdaq 100 declined 0.4%, adding to the index’s biggest slump since March. Treasury yields extended a spike along with other government bonds. The dollar was weaker, while the yen caught a haven bid.
Minutes from the Fed’s December meeting showed officials’ increasing preference for a faster path of rate hikes and a shrinking of the bank’s $8.8 trillion balance sheet. That could bring curtains down on unprecedented policy accommodation, which underwrote asset prices through the worst of the pandemic. The Fed is now at the core of the investment outlook for 2022, overriding continuing concerns such as slowing global growth, China’s regulatory crackdown and supply bottlenecks.
“There will undoubtedly be pockets of volatility surrounding Fed meetings throughout the year, but investors shouldn’t excessively fear the Fed, especially when there continue to be exciting alpha opportunities in markets,” Madison Faller, a global strategist at JPMorgan Private Bank, wrote in an email. “Growth and inflation will be decelerating throughout 2022, but nonetheless remain above historic trend levels. We think this will call for a much lower risk of a Fed-induced material market correction.”
The minutes, released Wednesday after the close of European markets, sparked a rout in U.S. stocks concentrated in expensive technology names. The Nasdaq 100 tumbled 3.1% after the release, while the 10-year Treasury rate crossed the 1.70% mark.
“Markets are concerned that we’ve never seen the Federal Reserve both lift interest rates off zero and reduce the size of its balance sheet at the same time. There was a two-year gap between those two events in the last cycle, so it is a valid concern,” wrote Nicholas Colas, co-founder of DataTrek Research. “Our advice is to invest/trade very carefully the next few days.”
U.S. jobless claims figures released Thursday did little to change the market mood. The claims rose to 207,000 last week, the release showed, but stayed within the range of forecasts by 30 economists.
“With the labor market somewhat under control, jobless claims are likely going to fade into the background while the Fed is focused on their inflation mandate,” said Mike Loewengart, managing director of investment strategy at E*Trade Financial. “Inflation is center stage when it comes to the Fed’s potential moves. While hiring has certainly been a challenge, the employment picture has been improving and edging toward what it was pre-pandemic.”
Joseph Quinlan, chief market strategist of Bank of America Global Wealth and Investment Management, said on Bloomberg TV and Radio that early in a Fed tightening cycle, equities tend to perform well.
“It’s at the end of the Fed tightening cycle when you see the rolling over. So we’re still constructive on equities, particularly with real interest rates being negative,” he said. “So don’t fear the Fed just now. The messaging is important obviously — a little bit of a shock yesterday. But in general, I don’t think yesterday really changed much in terms of the near-term outlook for equities.”
Treasuries extended their losses, with the rates between the two-year and 10-year tenors adding at least two basis points each. In Europe, stocks fell, while in Hong Kong, the Hang Seng Tech Index pared back losses to trade higher.
Bitcoin tumbled to $42,800. Crude-oil futures extended gains. Gold fell.
What to watch this week:
- Fed’s Bullard discusses the U.S. economy and monetary policy in an event on Thursday
- Fed’s Daly discusses monetary policy on a panel Friday
- ECB’s Schnabel speaks on a panel Saturday
For more market analysis, read our MLIV blog.
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.4% as of 10 a.m. New York time
- The Nasdaq 100 fell 0.4%
- The Dow Jones Industrial Average fell 0.5%
- The Stoxx Europe 600 fell 1.5%
- The MSCI World index fell 0.7%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.1322
- The British pound fell 0.2% to $1.3535
- The Japanese yen rose 0.3% to 115.74 per dollar
Bonds
- The yield on 10-year Treasuries advanced two basis points to 1.73%
- Germany’s 10-year yield advanced two basis points to -0.07%
- Britain’s 10-year yield advanced six basis points to 1.15%
Commodities
- West Texas Intermediate crude rose 2.4% to $79.69 a barrel
- Gold futures fell 1.8% to $1,791.60 an ounce
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