Nasdaq slumps into correction territory after painful start to 2022

The technology-heavy Nasdaq Composite fell into correction territory on Monday, dropping more than 10 per cent from an all-time high hit in November as a sell-off in high-flying shares gathers pace.

The index, which includes tech behemoths including Apple and Google-owner Alphabet, fell 2.2 per cent on Monday, following a 4.5 per cent decline last week. Analysts typically consider a 10 per cent fall from a recent high to mark a “correction” in markets.

The declines in tech were more severe than falls recorded in broader equity markets in the US and Europe. The sell-off has been propelled by surging yields on US Treasuries, as investors dump government debt in anticipation of tighter policy from the Federal Reserve. The benchmark S&P 500 fell 1.6 per cent, while the Stoxx Europe 600 dropped 1.1 per cent.

The Fed is considering a cycle of rate rises this year, as economic reopening and stimulus spending have pushed inflation to multi-decade highs and helped the labour market recover from the shocks of the coronavirus pandemic.

The change of mood has hit shares in tech businesses, which benefited from lockdowns as other industries struggled and were boosted by low rates that helped investors justify the high and rising valuations of a small group of large companies that prospered during the pandemic.

Line chart of  showing Nasdaq Composite falls 10% from November peak

“As you get more return on cash, or bonds, you are less willing to take the risk on volatile, expensive technology stocks,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.

Economists polled by Reuters expect data on Wednesday to show US consumer prices rose at an annual pace of 7 per cent last month, up from 6.8 per cent in November.

US unemployment dropped to an unexpectedly low 3.9 per cent in December, the labour department’s non-farm payrolls report showed last week. This came days after minutes from the Fed’s latest meeting showed the central bank’s officials had discussed raising rates “sooner or at a faster pace” than previously anticipated.

Strategists at Goldman Sachs expect the Fed to raise rates four times this year, after tethering them close to zero in March 2020, in a move that pulled down businesses’ funding costs and boosted global stocks.

“We continue to see hikes in March, June, and September, and have now added a hike in December for a total of four in 2022,” said Goldman’s Jan Hatzius in a note to clients.

“Declining labour market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks.”

The yield on the 10-year Treasury note rose as much as 0.04 percentage points to 1.808 per cent, its highest since January 2020, as the price of the debt fell to reflect anticipated increases in interest rates that make fixed-income securities less appealing.

This debt yield, which underpins companies’ borrowing costs worldwide, has climbed from about 1.53 per cent at the start of the year as traders also assessed the economic threat from the Omicron coronavirus variant as having faded.

The dollar index, which measures the US currency against six others, rose 0.5 per cent.

Meanwhile, in cryptocurrencies, the price of bitcoin fell below $40,000 on Monday for the first time since September 2021.

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