Overnight Headlines

*Fed warns faster rate rises may be needed to tame surging inflation

*Nasdaq posts biggest daily drop since February, Asia tech stocks plunge

*US 10-year Treasury bond yields continue to rise, above 1.73%

*US private payrolls jump with broad increases led by leisure and hospitality

US equities tumbled immediately after the Fed minutes, as they stoked worries about the prospect of earlier and faster rate hikes. Markets saw a classic defensive, value rotation with tech and small cap stocks getting pummelled. Large cap and low vol stocks like banks and industrials outperformed. The Nasdaq closed down 3.3% in its worst day since February 2021. The Dow lost 1.1% and the broader S&P500 was down 1.9%. Negative sentiment is feeding into Asia with futures heavily down in Europe.

USD remains relatively muted as losses were clawed back after the release of FOMC minutes. EUR continues to trade around 1.13. GBP popped up to 1.3598 as the UK Government didn’t announce stricter Covid restrictions. USD/JPY pulled back from the recent high at 116.35, consolidating its recent sharp gains.

Market Thoughts –Hawkish Fed spooks stocks

The sharp rise in bond yields had already got investor’s attention this year. But the FOMC Minutes from its hawkish December meeting put the boot into bonds, pushing yields up to highs last seen in October. Rotation out of stocks that surged during the pandemic picked up pace, as the looming spectre of higher interest rates prompted funds to buy into companies more linked to the recovery.

Clearly the level of bond yields is not that challenging for equities, but it is the pace of change that is hitting sentiment. The rotation has seen the main bank index jump almost 5% this year, closing in on a record high.

The bumpy ride may continue as focus is fully on the Fed, with last night’s minutes suggesting that March is now a “live” meeting with a 75% chance of a rate hike. A rate rise per quarter could also see four in total this year.

Chart of the Day – Nasdaq suffers in market rotation

The joy of Apple hitting the $3trn mark and Tesla delivering a record number of vehicles has been quickly forgotten within a few sessions. The prospect of rising rates lowers the appeal of the tech sector as high growth stocks are particularly sensitive to policy tightening that crimps future earnings potential, in turn knocking the sector’s high valuations.

The tech-heavy Nasdaq had rebounded before Christmas from the early December lows around 14,931. But resistance above 15,796 proved too much and prices plunged yesterday, back below the 100-day SMA at 15,264. The 15k area is initial support with the 200-day SMA below at 14,667.