Australian investors woke up this morning to yet another night of carnage on the US markets. Although, at first glance, it doesn't look that bad. The Dow Jones Industrial Average (INDEXDJX: .DJI) was only down 0.46% last night, after all. That's a pretty routine kind of movement.
But it was the tech sector that once again copped the brunt of the falls on the US markets overnight. Even though the Dow was 'only down 0.46%, the tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) fell a far more substantial 3.02% last night.
That saw favourite US tech shares like Amazon.com Inc (NASDAQ: AMZN), Netflix Inc (NASDAQ: NFLX) and Tesla Inc (NASDAQ: TSLA) fall 3.44%, 3.75% and 6.93%, respectively. Ouch.
Once again, the catalyst for these moves appears to be rising US government bond yields. As we've discussed before, rising bond yields hurt tech shares especially hard because it reduces the appeal of companies with less cash flow certainty.
In contrast, US blue-chip shares like Procter & Gamble Co (NYSE: PG), Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) and Bank of America Corp (NYSE: BAC) actually rose last night. Since these companies can deliver cash flow today (rather than hope to in the future), they are suddenly more appealing. That's just the way these things work.
We saw this paradigm reflected on the ASX this morning as well. ASX tech shares like Afterpay Ltd (ASX: APT), Xero Limited (ASX: XRO) and Zip Co Ltd (ASX: Z1P) open sharply lower.
But could this be a once-in-a-lifetime buying opportunity? Most of us would be used to the sight of tech share rising by now. That's what they have seemingly done over the past few years, after all.
Well, that might be true. It all hinges on one dynamic – the bond markets have to be wrong, and the Reserve Bank of Australia (RBA) right.
Tech shares vs bonds
Let me explain.
What the bond markets are doing right now is pricing in future inflation and future interest rate rises in response. If the RBA and the US Federal Reserve raise rates, it automatically raises the government bond yield. The markets are just pricing this in ahead of time.
According to a report from the Australian Financial Review (AFR) this morning, 10-year US Treasury bonds spiked to their highest yield in 14 months yesterday.
And yet, both the US Fed and the RBA are emphatically telling investors that this isn't what they are anticipating. The AFR report notes that Fed chair Jerome Powell this week told investors that the "strong bulk" of the Fed's committee does not expect rates to rise until at least 2024.
Our own RBA governor Philip Lowe has also said as much.
So someone's right, and someone's wrong here. The only question is who. If it's the RBA and the Fed that is right, then the bond markets are overreacting.
And that means, by extension, that investors are overreacting by selling US and ASX tech shares off. That could well mean this is a once-in-a-lifetime buying opportunity in the ASX tech space. Something to keep in mind!
