US technology stocks fell in overnight trading as the global bond sell off resumed. Industrial commodities and the US dollar continue to respond to an improving economic outlook, but bond and stock markets are grappling with the dark side of growth – inflation. In this shift in market thinking, long duration and non-income producing assets are particularly vulnerable.
US ten year bonds rose three points last night to 1.36%, up from 0.50% just six months ago. The concern is that thirty year bonds rose by more than four points, further steepening the long end of the interest rate curve.
The sell-off in bonds is like a car crash in slow motion for equity investors. Reports that tech stocks sank because investors are concerned about valuations are hard to accept given that many tech stocks in the US departed from any known valuation measures some time ago. Instead, a higher interest rate environment forces investors to consider the opportunity costs of investments. Stocks that have significant borrowing, or produce no income for investors, may be particularly vulnerable.
Gold is torn in this environment. The yellow metal is generally considered an inflation hedge, but its proximity to historic highs and the lack on associated income streams may see the negatives outweigh the positives in a rising interest rate and inflation environment.
Industrial commodity markets held no such fears. Base metals rallied, but crude led the complex with an almost 4% jump ahead of tonight’s US inventory data. The strength fed in currency trading, lifting the Norwegian kroner and the Australian, Canadian and New Zealand dollars.