S&P/ASX 200 Index (ASX: XJO) tech shares are taking a beating today.
Following a strong run for much of last week, here's how some of the leading large-cap tech companies are performing on Monday:
- Shares in buy now, pay later (BNPL) company Block Inc (ASX: SQ2) are down 6.7%
- Shares in accounting software provider Xero Ltd (ASX: XRO) are down 3.5%
- Shares in cloud-based software solutions provider WiseTech Global Ltd (ASX: WTC) are down 3.2%
After a few big up days last week, the S&P/ASX All Technology Index (ASX: XTX) – which also contains some smaller tech shares outside of the ASX 200 – is down 2.8% today.
The ASX 200 is also falling, though not as steeply, down 1.4% at this same time.
So, what's spooking investors today?
Why are ASX 200 tech shares selling off on Monday?
The big tech selloff today follows similar action in US markets on Friday, which saw the NASDAQ close down 3.8%. Dual-listed ASX 200 tech share Block fell 7.3% on NYSE on the day.
The reason for the selloff is the polar opposite of the reason for last week's rally. Namely, market expectations of future interest rate hikes from the US Federal Reserve, the world's most watched central bank.
Last week, investors were hopeful that the Fed might scale back its hawkish tightening stance.
Those hopes were dashed on Friday following the release of September's jobs data. That showed the US economy added more jobs than consensus expectations. The US unemployment rate dipped lower to 3.5%, the lowest in more than 50 years. Wages also continued to climb in September and are now up 5% over the full year.
ASX 200 tech shares are feeling the pressure, as the US Fed is now expected to continue with several outsized rate hikes. Tech shares, often priced with future earnings growth in mind, are particularly vulnerable to higher rates, which raise the present cost of investing in those distant earnings.
What are the experts saying?
Investors hoping ASX 200 tech shares may get a boost from a more dovish Fed will be disappointed by the medium-term outlook of two of its influential members.
"We look to be, according to our reports, headed for 4.5% to 4.75% by sometime next year," Chicago Federal Reserve Bank President Charles Evans said (quoted by Bloomberg).
Fed Governor Christopher Waller added, "Until we see any signs of inflation beginning to moderate, I don't know how we pause."
Oxford Economics US economist Nancy Vanden Houten believes investors should prepare for the Fed to hike rates by another 1.25% in 2022.
According to Vanden Houten (courtesy of The Australian Financial Review):
There is evidence of a slight easing in tight labour market conditions. However, it's not enough to knock the Fed off a track to raise the target range for the federal funds rate by another 125 basis points this year.
We assume that job growth, job openings, and importantly the inflation rate will continue to moderate through year-end, allowing the Fed to reduce the amount of rate increase to 50 basis points in December.
Looking a few quarters ahead, there is light at the end of the tunnel for ASX 200 tech shares, hammered by fast-rising rates.
"Everything hinges on inflation at this point. We do think it's going to moderate over the next few quarters," Peter Essele, head of portfolio management for Commonwealth Financial Network, said.
If last week was any indication, when inflation does moderate, the tech sector could enjoy a sizeable rebound.
