US stocks recorded their worst day in two months on Tuesday, as investors were unnerved by economic data suggesting interest rates have further to rise after months of increases by the Federal Reserve.
The blue-chip S&P 500 index ended down 2 per cent, with declines in every sector. The tech-heavy Nasdaq Composite slid 2.5 per cent. Both indices had their steepest daily losses since December 15.
The Vix index, a measure of stock market volatility and often dubbed Wall Street’s “fear gauge”, rose above 23, its second highest level of the year.
Markets have wobbled in recent days as investors gird for further interest rate rises from the Fed to combat inflation in the US economy. Yields on benchmark Treasury bonds reached three-month highs on Tuesday.
“The reason for the sell-off in the stock market is a reassessment of the [US Federal Reserve’s] path and the stark rise in Treasury rates,” said Lou Brien, strategist at DRW Trading. “The move higher in Treasury yields reinforces the Fed being tighter for longer.”
Benchmark 10-year Treasuries slid, pushing yields up to 3.95 per cent — their highest since early November. Interest rate-sensitive two-year notes yielded 4.73 per cent, approaching levels last hit in November, which were the highest since 2007.
S&P Global’s US composite purchasing managers’ index registered a reading of 50.2, an eight-month high that beat market expectations of 47.5, according to data released on Tuesday. That was mirrored by other bullish readings in the eurozone earlier in the day. A level above 50 indicates industry growth.
The data followed strong US payrolls and retail sales figures in recent weeks.
“Expectations of rate cuts later in the year were never very realistic,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. “There was an assumption that tightening would start to limit growth, and now people seem to have flipped from expecting a recession to a boom in a short period of time, based on a few releases which, granted, all say the same thing.”
In Europe, the benchmark Stoxx 600 closed down 0.2 per cent and Germany’s Dax shed 0.5 per cent after the S&P surveys for the eurozone also indicated private sector activity in the bloc was better than expected.
Investors were now more focused on interest rates than the prospect of stronger profits because of robust economic activity, said Neil Birrell, chief investment officer at asset manager Premier Miton. “People thought the end was in sight and there was some certainty, but every time we get a number like [the European PMI] it worries investors.”
ECB governing council member Olli Rehn said on Monday that rates would peak during the summer, but that inflation was “excessively high”.
“With inflation so high, further rate hikes beyond March seem likely, logical and appropriate . . . I assume that we will reach the ‘terminal rate’ in the course of the summer,” he said.
The yield on the 10-year German Bund rose as much as 0.01 percentage points to 2.56 per cent, closing at its highest point since the eurozone debt crisis in the summer of 2011.
Brent crude settled 1.2 per cent lower to $83.05 a barrel, while the US equivalent WTI lost 0.2 per cent to $76.16, with both benchmarks falling further after making slight losses last week.
In Asia, the Hang Seng index fell 1.7 per cent, while China’s CSI 300 gained 0.3 per cent after rising 2.45 per cent on Monday, its best one-day performance since late November. The index has risen 6.6 per cent this year.
Additional reporting by Jennifer Hughes in New York
