Tech selloff drives broad retreat

Morning Note

If you are looking for inflation signals, China’s factory gate prices are a pretty good leading indicator. So today’s report showing that producer price inflation rose 6.8% from a year earlier in April, the fastest pace in more than three years, could be of concern. Tomorrow’s US CPI numbers are going to be closely watched. On Friday we saw the market show that an easier-for-longer Fed ought to help risk assets. But whatever the Fed tries and sticks to in terms of its employment mandate, the bond market will move if inflation takes off. The wage component of the jobs report was underappreciated. A lack of employees will drive up wages and end prices. Wage-push inflation is more ‘dangerous’ than cost-push.

My worry is we have a perfect storm of wage-push, cost-push and demand-pull pressures that won’t be as transitory as the Fed thinks (ignoring the fact that inflation is here already, has been for years in asset prices, just not in the narrow gauges used by central banks). US 10-year yields at 1.62% are at the highest in a couple of weeks, whilst 5-year breakeven inflation expectations remain elevated at multi-year highs above 2.7%.

The inflation story matters for the stock market as rising inflation expectations push up nominal yields and the discount rate on the tech/growth/momentum parts of the market that have underpinned the last decade’s bull run. We saw this yesterday. Tech stocks took a beating and dragged the rest of the market down with them. The Dow Jones retreated into the red in the closing part of the session, having earlier hit a record high, as the Nasdaq composite tumbled 2.5%. The Nasdaq 100 fell more than 2.6% and closed below its 50-day simple moving average for the first time the end of March. Tesla fell 6%, the ARK Innovation ETF was 5% lower and Apple fell over 2.5%. The heavy weighting of tech in the broader market left the S&P 500 down 1% for the day. Overnight Asian markets fell sharply, with the Nikkei 225 off 3% and the Hang Seng down 2%. The more commodity focused ASX dropped 1%. US futures point to further losses when Wall Street opens later.

This is shaping up to be another tech bleed as we saw in September last year, with a sea of red on the boards in Europe this morning. Tech stocks in Europe took the cue from across the pond, dragging the major bourses lower but the risk-off tone is permeating the whole market. The FTSE 100 retreated under the psychologically important 7,000 level, having hit a post-pandemic high of 7,164 in the earlier part of Monday’s session. NatWest fell over 3% to 190p after the government offloaded a 5% stake at this price. IAG fell close to 5% as investors showed more displeasure at the government’s green list. Scottish Mortgage dropped over 4% on its exposure to the US and other tech stocks. Whilst this was a tech-led sell-off, the worst sectors are the reflation plays (i.e, the new ‘momentum’ stocks) – basic materials, financials and energy. On the Stoxx 600, the worst sectors this morning are consumer cyclicals, tech and basic materials with only a handful of stocks in the green.

Meanwhile, oil, gasoline and heating oil fell as fears of a prolonged outage of the Colonial pipeline eased. The company said it is working in phases to have the pipe working again by the end of the week. Weaker risk sentiment in the Asian session also sent crude futures lower.

Gold remains well supported on the 38.2% as bulls pause.

Gold chart performance on 11.05.2021

UK preliminary GDP figures are released tomorrow. I’ve previewed what to expect from Wednesday’s printing. Click here for my predictive analysis of the nation’s GDP movements and what it means for the economy moving forward.