The S&P/ASX 200 Index (ASX: XJO) is down 1.85% at 6707 points in early trade today as US indices were sold off overnight across the board.
The S&P500 (INDEXSP: .INX) closed 2.45% lower, the Dow Jones Industrial Average (INDEXDJX: .DJI) was down 1.75%, and the Nasdaq Composite (INDEXNASDAQ: .IXIC) was hit the hardest, down 3.52%.
What’s driving the selloff?
Long term US interest rates, otherwise known as bond yields, have continued to push higher, briefly touching 1.60% last night.
The initial COVID-19 induced selloff back in March 2020 triggered bond yields to nosedive into record low territory. After going as low as 0.50%, bond yields have made a steady recovery to close at 1.52% this morning.
Higher yields flag higher borrowing costs and inflation, which could have a negative impact on businesses and the performance of equity markets.
Lower interest rates can put upward pressure on stock prices. As bond buyers receive a lower interest rate and less return on their investment, it forces them to consider buying higher-risk investments such as shares to get a better return.
How will this impact ASX 200 shares?
If the ASX follows the US market this morning, it’s worth noting that ASX 200 tech shares could be the worst off given the greater selloff for the tech-heavy Nasdaq.
In a higher interest rate environment, companies with high free cash flow in cyclical sectors such as financials, materials, utilities and real estate tend to perform better.
A similar narrative to Tuesday
Higher bond yields triggered a similar selloff on Tuesday, where ASX 200 shares such as Afterpay Ltd (ASX: APT), Lynas Rare Earths Ltd (ASX: LYC), Zip Co Ltd (ASX: Z1P), Domino’s Pizza Enterprises Ltd (ASX: DMP) and Seek Limited (ASX: SEK) were all down north of 5%.
Despite household ASX 200 growth shares being sold down, the broader market closed 0.86% higher on Tuesday. This was driven by gains across financials, notably the big four banks, mining and real estate.