Australian technology stocks have led the S&P/ASX 200 Index to heavy losses, sending the market more than 2 per cent lower after Wall Street’s digital giants slumped overnight.
The benchmark fell by 117 points, or 1.9 per cent, to 5932 on Thursday. It earlier dropped to 5918.3, the lowest in almost six months.
At the close in New York, the Dow Jones Industrial Average was more than 831 points lower for a 3.2 per cent drop.
With around $US320 billion erased from the Nasdaq over the session, tech stocks were the focus of selling on Wall Street. As US bond yields traded at 3.16 per cent overnight, investors appear to be re-evaluating the dominant growth stocks.
“It’s the velocity that’s throwing people off,” said Greg Bundy of Federation Asset Management, speaking about the speed of the rise in US 10-year Treasury yields.
“The more the US economy improves, then he quicker the US Federal Reserve has to raise rates,” he said. Going forward, the silver lining is that if there’s another selloff like the one in the US on Wednesday, “then the Federal Reserve may pause in hiking interest rates.”
US President Donald Trump lashed out at the Federal Reserve for its raising of official interest rates, in comments made on Wednesday in the US.
“The Fed has gone crazy,” he told reporters as he arrived in Erie Pennsylvania for a campaign rally. The central bank is “too tight”. The Fed has been in a tightening cycle since late 2015 and is expected to hike again in December.
Small caps, tech decline
US markets were primed for a selloff, according to Simon Doyle at Schroders. “Valuations were pretty full particularly in technology companies and market expectations in terms of future earnings growth were optimistic.”
Add in a changing interest rate environment and rising tensions around tariffs and trade that don’t appear to be close to a resolution as the midterm elections approach, and markets have the ingredients for a sell-off, Mr Doyle said.
“I’m not surprised that we had a sell-off and I think we will have a few more.”
In a rising yield environment, the spectacular gains recorded by small caps and technology stocks are at risk.
On Thursday, WiseTech Global fell 9 per cent, Appen 7.8 per cent, Afterpay Touch 6.9 per cent, and A2 Milk, Altium and Domain Holdings more than 5 per cent.
“The downside is around technology stocks,” said Kerry Craig at JPMorgan Asset Management. There are extended valuations in the sector, he noted and investors are starting to worry if earnings are going to meet expectations with the US reporting season set to kick off on Friday.
Still, it’s “pretty normal” to get these spikes in volatility toward the end of the cycle, he added.
The tech sector sell off was the worst one day sell off for the sector since June 2016, noted Elizabeth Tian at Citigroup. “It started in China, spread to the US and is now reflected in our market today.”
Technology stocks are taking the brunt of global selling because they were at the forefront of the market advance this year, the director of equity products said.
“A lot of that rally was concentrated in a narrow band of tech stocks that had high valuations and were priced for perfection. Now we’re seeing a bit of an unwind.”
At the same time, there’s been some buying in gold stocks, she noted, as “they are a bit of a hedge.”
Gold stocks were the only sector to advance firmly on Thursday, led by a 3 per cent rise for Resolute Mining.