Stocks in the United States suffered their worst day for two months Tuesday as investors became uneasy by economic data that suggested interest rates may be rising further after months of Federal Reserve increases.
Blue-chip S&P 500 index fell 2 percent, with all sectors reporting declines. Tech-heavy Nasdaq composite lost 2.5 percent. Both indices suffered their worst daily losses since December 15th.
The Vix index (a measure of volatility in stock markets and often called Wall Street’s “fear gauge”) rose to 23. This is its second highest level for the year.
Recent market movements have been sluggish as investors brace for Fed interest rate increases to counter inflation. On Tuesday, benchmark Treasury bonds yields reached their highest level in three months.
Lou Brien, strategist at DRW Trading, stated that the reason for the stock market sell-off is a reassessment on the US Federal Reserve’s path and the sharp rise in Treasury rates. “The Fed is tighter for longer because Treasury yields have risen.”
Benchmark 10-year Treasuries fell, pushing yields up 3.95% — their highest level since November 2007. Two-year interest rate-sensitive notes yielded 4.73 percent, close to levels that were last reached in November 2007, which were the highest recorded since 2007.
According to data released Tuesday, S&P Global’s US composite buying managers’ index recorded a reading 50.2, which was eight months higher than market expectations of 47.5. This was also reflected in other bullish readings from the eurozone earlier today. An industry’s growth rate is indicated by a level above 50.
This data was generated following strong US retail sales figures and payroll numbers in recent weeks.
Michael Metcalfe of State Street Global Markets’ macro strategy said that expectations of rate cuts later in this year were not realistic. There was a belief that tightening would slow growth. However, people now seem to be expecting a boom rather than a recession based on just a handful of releases.
The benchmark Stoxx 600 in Europe closed down 0.2% and Germany’s Dax fell 0.5% after S&P surveys on the eurozone indicated that private sector activity was higher than expected.
According to Neil Birrell (chief investment officer at Premier Miton), investors are now more concerned about interest rates than the possibility of higher profits due to robust economic activity. People believed the end was near and there was some certainty. But every time we see a number like the European PMI, it worries investors.
Olli Rehn is a member of the European Central Bank’s governing council. He said that rates will peak in the summer but that inflation was “excessively low”.
“With inflation at such high levels, rate hikes beyond March seem logical and appropriate. . . He said that he believed we would reach the “terminal rate” in the summer.
The yield on the German Bund’s 10-year German Bund increased by 0.01 percentage points to 2.56 percent, closing at its highest level since the Eurozone debt crisis of the summer 2011.
Brent crude settled 1.2% lower at $83.05 per barrel while WTI lost 0.2% to $76.16, the US equivalent. Both benchmarks fell further last week after making small losses.
Asia’s Hang Seng index dropped 1.7%, while China’s CSI 300 rose 0.3% after climbing 2.45% on Monday, its best single-day performance since November. The index is up 6.6% this year.