The Nasdaq Composite (NASDAQ: .IXIC) took a beating overnight as rising bond yields continued to threaten the roaring equity markets. S&P/ASX 200 Index (ASX: XJO) tech shares are tipped to follow the lead of the United States when the market opens today.
Let's take a closer look.
Yields rising to highest levels since January 2020
Benchmark US government yields pushed higher overnight to close at a 14-month high of 1.73%. Yields have more than tripled from August 2020 lows of 0.50% and almost doubled year to date from 0.90%.
Rising bond yields reflect a sign of optimism as stimulus and pent-up consumer demand could lead to a rise in inflation. This comes as the US is dishing out its US$1.9 trillion stimulus package which plays into the rising inflation narrative.
The roaring equity markets have become addicted to record-low and near-zero interest rates. Record low-interest rates have meant that investors must take on more risk to maintain the same return. This translates to a flow of funds from low-risk assets such as bonds into higher-risk assets such as equities.
Expanding vaccination campaigns and a reopening global economy has now put the issue of rising inflation back on the table. Subsequently, rising inflation has brought the topic of possible interest rate hikes to the fore, putting pressure on the tech-heavy Nasdaq.
Some countries have already opted to raise interest rates in response to growing inflationary pressures. These include Ukraine, Brazil, Georgia and Turkey.
The US Federal Reserve has attempted to curb the concerns of rising interest rates by reaffirming that no hikes are likely until at least 2023.
Tech and growth shares most vulnerable to rising interest rates
Tech and growth shares are most vulnerable to higher interest rates. Most of these companies are expected to deliver significant growth in the medium to long term. From a valuation perspective, these futures earnings would be worth less today when discounted by higher interest rates.
This compares to value shares in sectors such as financials, commodities and real estate that are less vulnerable to rising rates.
This could explain why the Nasdaq took a 3% dive overnight, compared to the S&P 500 Index (SP: .INX) that lost 1.48% and the Dow Jones Industrial Average Index (DJX: .DJI) which fell only 0.46%.
US banks such as Wells Fargo & Co (NYSE: WFC) and Bank of America Corp (NYSE: BAC) finished the overnight session in the green. Meanwhile, US tech heavyweights Facebook Inc (NASDAQ: FB), Apple Inc (NASDAQ: AAPL), Amazon.com Inc (NASDAQ: AMZN), Netflix Inc (NASDAQ: NFLX), Microsoft Corporation (NASDAQ: MSFT) and Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) all fell between 1.90% to 3.50%
This could influence the way the ASX 200 plays out today, with potential weakness across tech shares and greater resilience across cyclical stocks such as the big four banks.
