October 4, 2022
Wall Street suffers worst sell-off since June 2020 following inflation data

Wall Street suffered its worst sell-off since the early days of the pandemic, when official data showed US inflation unexpectedly spiked in August, prompting a growing audience to ask the Federal Reserve to deal with rising prices. will need to act more aggressively.

The benchmark S&P 500 stock index fell 4.3 per cent, its worst day since June 2020 with 99 per cent of companies slipping in value. The Nasdaq Composite fell 5.2 per cent as technology groups exposed to higher rates bore the brunt of the sell-off.

The yield on short-dated government debt tracking interest rate expectations rose to its highest level in nearly 15 years, as investors raised their bets that the Fed would have to do more to stamp out rising inflation.

Line chart (%) of performance as of September 13, 2022 showing US stocks have posted the biggest decline since June 2020

Wall Street rallied in Asia stocks on Wednesday, with Hong Kong’s benchmark Hang Seng index down 2 per cent and Japan’s Topix index down 1.7 per cent. China’s CSI 300 index fell 1.3 per cent, while Australia’s S&P/ASX 200 fell 2.7 per cent.

According to data from CME Group, investors on Tuesday gave a 1-in-3 chance that the US central bank will rise a full percentage point this month, rather than rise by 0.75 percent, which remains the consensus expectation.

Inflation figures put further pressure on US central bank policymakers, who have promised to do everything in their power to cushion rising prices. His apparent determination to abide by the pledge has given rise to fears that the economy is headed for a hard landing.

Tech stocks are particularly sensitive to changes in interest rate expectations because valuations are based largely on future growth prospects. Facebook owner Meta and chipmaker Nvidia were the biggest losers, both falling 9 percent, while Amazon lost 7 percent.

Apple’s market valuation fell by $154bn and Microsoft’s by $109bn, with both companies recording their biggest daily losses since September 2020.

The frenzied sell-off on Tuesday affected almost every corner of the US financial markets. At one point during the trading day, about 2,000 shares traded on the New York Stock Exchange simultaneously fell in value, a phenomenon commonly seen during times of market tension. Investors rush to hedge against further downside by depositing in equity put option contracts, which could pay off if the market continues to decline.

The sharp moves were intensified by official data, with US consumer prices up 0.1 percent in August from the previous month, compared to a 0.1 percent drop expected. The annual rate came in at 8.3 percent, down from 8.5 percent in July, but higher than the 8.1 percent Wall Street economists had predicted.

Most worrying for Fed policymakers is that core consumer price hikes — which isolate volatile commodities like energy and food — rose from 5.9 percent to 6.3 percent.

Matt Perrone, director of research at Janus Henderson Investors, said the data was “a clear negative for equity markets”.

He added: “The warmer-than-expected report means we will get continued pressure . . . through rate hikes. It also pushes back any ‘Fed pivots’ that markets were hopeful of in the near term.”

In the Treasury bond market, the two-year yield, which closely tracks interest rate expectations, hit its highest level since October 2007, rising 0.18 percentage points to 3.75 percent at the end of the day.

Line chart of the yield on the 2-year US Treasury (%) shows a selloff that pushed the 2-year US Treasury yield to a 15-year high

“The most dramatic thing . . . was the move in the Treasury market today in two-year yields,” said Tom Di Galoma at Seaport Global Holdings. [a 0.75 percentage point increase] And maybe more. ,

Following the report, investors in the futures market bet that the Fed’s benchmark interest rate would be 4.17 percent by the end of the year, compared to 3.86 percent expected before the report. That means an increase of 0.75 percent in September, plus another absolute percentage increase during November and December.

The prospect of higher rates prompted a bounce in the dollar, causing it to rise 1.4 percent against a basket of six peers. The euro and the pound fell 1.4 percent and 1.5 percent, respectively.

Germany’s two-year bond yield rose 0.08 percentage points to 1.37 percent and the 10-year yield rose 0.08 percentage points to 1.72 percent, as selling cascades in eurozone bonds.

In Europe, the regional StockX 600 stock gauge climbed 1.8 percent in the previous session to close 1.5 percent lower. London’s FTSE 100 lost 1.2 per cent.

Additional reporting by Hudson Lockett in Hong Kong

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