Tech equities took a downturn on Monday as traders awaited the release of a slew of economic and revenue statistics later this week amid expectations of higher interest rates.
The S&P 500 fell more than 2% at trading day lows, adding to losses after the blue-chip index finished the first week of trading in negative territory at the start of the year. The Nasdaq Composite dropped after having its lowest week since February 2021. The Dow dropped as well. Moreover, risk assets were also having a difficult time with Bitcoin dropping below $40,000 for the first time in the past four months.
Treasury rates rose, with the benchmark 10-year yield above 1.8% for the first time since January 2020.
"Since December's rate hike, the valuation of companies with quick growth and tight margins has declined, but a well-ordered pattern in Russell 3000 shares indicates that more repricing is imminent," Goldman Sachs chief equities analyst David Kostin remarked.
"We previously demonstrated that interest rate volatility has an influence on stock profits. Stocks are often influenced by nominal or real interest rate swings more than 2 standard deviations during a five-day or one-month time period. In both circumstances, the amount of the recent yield counts as a 2+ standard deviation," he noted.
The rise in rates and volatility in US markets followed the publication of the Fed's December meeting minutes late the previous week. This indicated that some central bank authorities anticipated a faster beginning to interest rate rises and the balance sheet runoff procedure than many investors expected. Goldman Sachs analysts now anticipate the Fed to increase interest rates four times in 2022, one more than initially predicted, and that the Fed's balance sheet reduction would start in July or early.
According to Nicholas Colas, co-founder of DataTrek Research, price action in 10-years was all about what the Federal Reserve would do with its balance sheet. "We'll learn more on Tuesday when Fed Chair Jerome Powell's renomination session begins at 10 a.m. One thing is certain: the equities market's volatility is far from done."
"He will be able to convince legislators and the public during his confirmation hearing that the Federal Reserve would endeavor to control inflation in 2022," Colas noted. "We predict greater market volatility this week as a result of this."
Traders will be looking forward to new inflation data on Wednesday, in addition to Powell's confirmation hearing before the Senate Banking Committee on Tuesday. That day, the Bureau of Labor Statistics will issue the December CPI, which is predicted to indicate a 7.0% year-on-year increase in prices – the most significant increase since 1982. And, towards the end of the week, major banks like JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) are expected to report before the start of the trading day on Friday.
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