US stocks tumble in second day of turbulence on Wall Street

Market nervy over Fed tightening of monetary policy

Wall Street stocks dropped sharply on Tuesday as markets were jolted by nerves about the US central bank tightening monetary policy and renewed selling of technology shares spilled into every sector of the benchmark share index.

The technology-focused Nasdaq Composite index fell 2.9 per cent in early dealings, following a wild ride in the previous session when it fell almost 5 per cent before ending the day with a fractional gain.

The broader S&P 500 index, which is on course for its worst January performance on record, dropped 2.6 per cent. Tuesday’s selling was broad, with basic materials, tech and consumer goods companies all taking a hit. The blue-chip index has lost almost a tenth of its value so far in 2022.

In a sign of the rising tension, the Vix, a measure of expected short-term volatility in US stocks known as Wall Street’s “fear gauge”, traded at 35.7, well above its long-run average of about 20.

Tilt

“Volatility hurts everything, so things that should be robust and defensive get caught up in it,” said Nitesh Shah, research director at WisdomTree.

Investors are grappling with a hawkish tilt by the US Federal Reserve, which finishes its latest monetary policy meeting on Wednesday. Fed officials are expected to signal their willingness to raise interest rates in March to battle surging inflation. Futures markets have priced in about four rate increases by the central bank this year.

"[The ]Fed's hawkish pivot [is] a new source of market stress," analysts at Barclays said on Tuesday, adding that "the pain has so far been localised to high valuation stocks, but signs of a broader risk-off are brewing".

The change of stance comes after the Fed pushed borrowing costs near zero and bought vast quantities of Treasuries and other debt instruments to ease financial conditions throughout the pandemic, boosting stock markets and investors’ appetite for speculative assets.

Some analysts expect the Fed may end its two-day meeting on Wednesday by soothing fears of rapid rate rises affecting economic growth.

“The market has got a bit ahead of itself,” said Jorge Garayo, global head of inflation strategy at Société Générale. “This meeting will be about pushing back against even more hikes being priced.”

Volatility

US Treasury prices softened on Tuesday, after firming in recent days as traders sheltered from stock market volatility. The yield on the benchmark 10-year Treasury, which moves inversely to its price and sets the tone for debt pricing worldwide, added 0.02 percentage points to 1.76 per cent.

The dollar index, which measures the US currency against six others, increased 0.3 per cent as traders bet on rate rises and moved money into the haven asset.

The Stoxx Europe 600 index was down marginally in Tuesday afternoon dealings after a 3.8 per cent drop in the previous session. In Asia, Hong Kong’s Hang Seng share index fell 1.7 per cent as Chinese tech companies declined.

Copyright The Financial Times Limited 2022