Nasdaq closes down 5% in sharpest fall since 2020

Every large sector in the red, with discretionary and tech firms among biggest fallers

Wall Street closed sharply lower on Thursday in an abrupt reversal from the rally in the previous trading session, with the Nasdaq registering its biggest one-day decline since June 2020 and one of the largest U-turns since markets were pummelled in the early months of the pandemic.

The Nasdaq Composite, comprising many of the largest US technology companies, fell 5 per cent in the New York session.

The blue-chip S&P 500 index also declined significantly, sliding 3.5 per cent with more than 95 per cent of the stocks in the benchmark ending lower.

Every large sector was in the red, with industries including consumer discretionary and technology companies among the biggest fallers.

Rates

The Federal Reserve on Wednesday raised its main interest rate 0.5 per centage points, the biggest increase since 2000, in an attempt to tame soaring inflation. Fed chief Jay Powellsent a strong signal that the US central bank is likely to raise rates by the same amount at it next two meetings.

Mr Powell’s remarks were at first perceived as dovish, especially after he appeared to take the possibility of a 0.75 percentage point rise off the table for this year. Stocks subsequently rose on Wednesday, with the S&P recording its best day since May 2020.

The sharp sell-off on Thursday was described as “a capitulation trade”, by Tom di Galoma, managing director at Seaport Global Holdings.

“You’ve got more tightening along the road, so there’s no reason to buy the dip in equities. There’s also no reason to buy bonds at this level because it doesn’t look like inflation is going anywhere.”

Shares of some of corporate America's biggest names lurched lower, with Amazon down 7.6 per cent, Tesla sinking 8.3 per cent and Apple dipping 5.6 per cent. The declines were not accompanied by a surge of trading activity, however, and volumes on the Nasdaq were roughly in line with the 100-day moving average, Bloomberg data showed.

Options

Instead, the move lower on Thursday might have been exacerbated by trading in options and futures markets, as banks and brokers raced to hedge themselves as stocks fell, said Cantor Fitzgerald’s head of derivatives trading Matthew Tym.

“With the 10-year [Treasury] move, the move in oil and currencies, we would have sold off, but I don’t think it would have been as quickly as this morning,” he added. “Do I think we’ve seen a bottom? Certainly not.”

US government bonds also suffered an intense bout of selling, sending the yield on the 10-year Treasury note up 0.13 percentage points to 3.1 per cent.

In a sign of global economic stress, the Bank of England on Thursday warned the UK will slide into recession this year as higher energy prices push inflation above 10 per cent.

"This is really the sum of all our fears," about the UK economy, said Roger Lee, head of UK equity strategy at Investec.

“Growth forecasts have been downgraded, inflation expectations have been upgraded and interest rates are still going up.”

– Copyright The Financial Times Limited 2022