Financial market research and analysis

US equities experienced their worst sell-off in 8 months overnight. The Nasdaq suffered its biggest one-day decline since June 2016. The S&P tumbled over 3.3% on its fifth straight day of falls, the longest S&P sell-off since Trump took office two years ago.

European stocks are pointing to heavy losses on the open as equities are set to continue to freefall.

Rotation out of tech stocks

The bloodbath for global equities comes as investors adjust to a world of higher US interest rates and US Treasury yields. As concerns increase over higher interest rates dampening growth, investors are evolving their trading strategies accordingly. Plays into riskier growth stocks, such as tech stocks on the Nasdaq, are being replaced with more conservative strategies such as moves into higher yielding defensives. To say risk appetite has taken a hit would be an understatement, riskier growth equities are off the menu and safe havens, such as the yen, are an attractive proposition.

The sea of red bled across into Asia overnight, where tech stocks bore the brunt of the selloff. These moves are purely interest rate related rather than there being any specific issue with tech itself. This is the market catching up with the move higher in Treasury yields last week. The moves we are seeing mirror the sell that we saw back in February when a move higher in US Treasury yields spooked investors. Overnight the VIX, also known as the fear gauge of the market, rallied to a six-month high, breaking through 20.  Of note, this remains below the 50 levels that we saw earlier in the year.

Headwinds becoming hard to ignore

The sort of structural shift that we are seeing in the markets right now is part of the natural ebb and flow of market movements. Investors are booking profits and liquidating positions whilst they take a moment to think where to go from here. The timing of the sell-off, just days before US earnings season unofficially kicks off on Friday, is more than a coincidence. Whilst blowout earnings are expected once again, fears are growing over the forward guidance firms are going to give.  Market headwinds such as higher interest rates, higher energy prices, dollar strength and tariffs are unnerving investors and creating a cautious picture going forwards.

US CPI data in focus

Earlier in the year, the Treasury yield-inspired equity sell-off calmed after weaker US economic data soothed market fears of higher rates. Today we see the release of the US CPI data. Expectations are for inflation to have ticked higher in September to 2.3% from 2.2% in August. A surprise to the upside could exasperate speculation that the Fed will steepen the path of interest rate rises. This could send yields higher still and put more pressure on the US markets when they open later today. On the other hand, a weaker inflation figure could serve to calm investor fears.