On Thursday, after the policy decision from the European Central Bank, Bank of England, and the Federal Reserve, the largest publicly traded U.S. technology stocks took a nosedive. The tech-heavy Nasdaq Composite had its worst day since late September declining 2.5%, while the benchmark Standards & Poors 500 fell 0.9%, leading to a decline in the tech sector. This year, Nvidia and Advanced Micro Devices, two of the best-performing large-cap U.S. companies, were laggards, falling 6.8% and 5.4%, respectively. Tesla, Adobe, and Qualcomm were also hit hard, with shares falling 5%, 10.2%, and 5.9%, respectively. The swings wiped out gains made on Wednesday when Fed Chair Jay Powell expressed optimism about the economy and positioned the U.S. central bank for tighter policy. While some fund managers were expecting the Fed to take a more hawkish stance, others were relieved that it was not proposing a more aggressive tightening.
These sentiments have faded temporarily, at least in the stock market. As their value is based on the future prospect, the tech stocks are particularly sensitive to interest rates that are diminished by higher borrowing costs.
Jack Ablin, chief investment officer, Cresset Wealth Advisors, said that it is an interest-rate trade and quality trade. He further added low-interest-rate expectations on Thursday, indicating that the stock market is moving out of sync with U.S. Treasury bonds. The two-year yield, which swings with interest rate forecasts in the U.S. Treasury market, slipped 0.05% points to 0.62%. The 10-year Treasury note yield fell 0.03%, points to 1.43%. The U.S. stock market’s falls on Thursday contrasted sharply with earlier-in-the-day rises in European and Asian markets.
Stock markets in continental Europe also registered significant gains as London’s The Financial Times Stock Exchange 100 Index rose 1.3%. There was a rise in the regional Stoxx 600 by 1.3%. In Asia, the Topix index in Japan increased by 1.5%. On Thursday, the Bank of England’s Monetary Policy Committee voted 8-1 to raise interest rates by 0.15% points to 0.25%, surprising several analysts who had anticipated the bank to stay the course given the rapid spread of the Omicron coronavirus subtype. Macro strategist at Lombard Odier, Bill Papadakis, said that the Omicron was an obvious risk. In order to balance things out, a hike was the right thing to do. However, the Bank of England’s approach for the economy has become more resilient to Covid, and Omicron did not pose much of a threat to begin the hiking process.
On the decision of the Bank of England, the investors sold the U.K. government bonds, which pushed 10-year gilt yield from 0.02% points to 0.75%. Eurozone debt was also affected by this selling, with Germany’s 10-year yield rising from minus 0.36% to 0.01%. The central bank’s pandemic-era bond-buying program was to terminate net purchase by next March, as the policymakers at European Central Bank confirmed on Thursday. However, It will increase the rate of bond purchases under another plan by €20 billion to €40 billion in the second quarter of next year, before tapering it back to €20 billion in October 2022.