A SELL-OFF in Chinese shares overnight extended the rout in US markets on Tuesday, as tighter government regulations in China led investors to dump holdings.
This, coupled with the Federal Reserve’s policy meeting, has put investors on guard and drove profit taking as US stocks fell from record highs and bond yields to hit all-time lows.
With a gap in volatility indexes signaling further weakness ahead, share prices have skidded as global stock markets pulled back.
In the United States, investors turned cautious as they awaited the Fed’s policy statement, turning all eyes on what Fed Chair Jerome Powell says at a post-meeting news conference on Wednesday at 2 pm EDT (1800 GMT), in relation to inflation, economic growth, interest rates and when the Fed will likely start reducing its purchases of government bonds.
Some investors worry that the fast-spreading Delta variant of the coronavirus may thwart the global economic recovery, at a time when inflation in countries such as the United States has accelerated faster than expected.
A stalled economic recovery and rising price pressures would complicate monetary policy, and force central banks to balance the objectives of supporting growth and tempering price rises.
“There is some concern over where we are on monetary policy,” said Commentary LLC and Strategic Board Solutions Llc founder Peter Kenny.
“There’s no question that the Fed is going to address the elephant in the room, and that is inflation,” he said. “It appears that inflation is not transitory.”
Analysts agree that low interest rates are generally a boon for equities and any sign of a faster-than-expected tightening in the Fed’s policy – whether raising interest rates or tapering bond purchases – could rattle the stock market.
The Dow Jones Industrial Average ended down 0.2% at 35,059 points, and the S&P 500 shed 0.5% to end at 4,401 points. The Nasdaq Composite slid 1.2% to 14,660 points, its biggest one-day drop since May 12, hurt by some bets that the earnings growth of tech stocks is already priced into valuations.
The pan-European STOXX 600 index finished 0.54% lower and MSCI’s gauge of stocks across the globe shed 0.81%.
Still, losses on Wall Street and in Europe were modest compared with overnight declines in China. The blue-chip Chinese CSI300 index plunged 3.5%, while the Hang Seng Tech index tumbled almost 8%, losing a whopping 17% in just three days.
In keeping with the muted mood in markets, the yield on 10-year Treasury inflation-protected securities (TIPS) hit an all-time low of -1.147% before rebounding to -1.129%.
Real, or inflation-adjusted, bond yields across major economies have fallen in recent sessions, which analysts attribute to growing concern about the economic outlook, as well as technical factors such as hefty bond-buying by central banks.
The yield on 10-year Treasury notes was down at 1.238%.
Currency investors also played it safe before the Fed meeting outcome. The dollar, which has risen broadly for more than a month on expectations that, as the economy strengthened, the Fed would tighten its policies, gave up some gains on Tuesday as investors shunned big bets before Powell’s remarks.
The dollar index fell 0.17%, and a softer dollar lifted the euro by 0.16% to US$1.1821.
The somber mood led oil prices to give up earlier gains. U.S. crude settled 0.36% lower at US$71.65 per barrel and Brent was at US$74.48, down 0.03% on the day.
The slight risk aversion amongst investors benefited bullion. Spot gold added 0.1% to US$1,799.64 an ounce. US gold futures gained 0.28% to US$1,799.50 an ounce.
Cryptocurrencies, a barometer of investors’ risk appetites, also succumbed to the cautious overtone in markets and pared earlier gains.
Bitcoin last rose 1.8% to US$37,960.44, recouping some losses after Amazon.com Inc offered a qualified denial of a weekend news report that said it was preparing to accept cryptocurrencies. – July 28, 2021