US equities bore a dramatic brunt in yesterday’s trading session. For instance, technology stocks, which are the most rate-sensitive sector, fared considerably worse than defensive sectors. It’s not news to anyone that the tech sector has taken a sudden downturn. That’s after a near doubling from the pandemic-era nadir following “liberation day” in mid-April. Investors are increasingly concerned about the breadth of leadership in the market. When only a handful of mega-cap tech companies are making new highs, that is cause for concern.
As market futures for both Europe and the US projected even more weakness, especially in Europe, the tech sector’s hand was shown. The Dow Jones Industrial Average finished just barely in the green — up 0.02%. The S&P 500 was down 0.6%, the Nasdaq was down 1.5% and the Russell 2000 was down 0.8%. This move lower in equities occurred alongside a modest correction in US rates, in turn a sign of worsening risk sentiment across investors.
Tech Sector Under Pressure
Today’s short lived correction in technology stocks follows a blistering pace of growth. Ever since the post-‘liberation day’ low in April, technology shares had rocketed, fueled by euphoria and muscular earnings beatdown reports. The market is narrowing its leadership to just a handful of these mega-cap names. As the vast majority of these companies peaked in new absolute and relative highs, aria of their sustainability have begun to play.
The selloff spreading to even relatively safe tech stocks has left European and US futures all pointing lower ahead of the open. Even more troubling is the circumstance. Tech-heavy indices in Asia are feeling similar pressure, with Taiwan’s market already down overnight by nearly 2.5% as we go to press. This broad-based weakness underscores the vulnerability of the tech sector as it grapples with investor apprehension over valuation and future growth prospects.
Now, as tech stocks again falter, they are dragging down associated sectors and sending collateral damage through the entire energy and commodities complex. Yesterday’s US session was a bloodbath for risky assets. Artificially inducing the dollar to appreciate resulted in adverse effects on energy and commodity prices, which in turn had negative spillovers on related currencies and financial instruments. Even with the recent downturn, the Norwegian Krone (NOK) has shown significant overperformance. NOK FX became one of the more obvious losers of the session.
Japanese Trade Balance Faces Unforeseen Shift
In one of the biggest international economic shocks of the month, Japan’s trade balance swung widely. It ended up in the red, posting a deficit of JPY 117.5 billion. Exports to the United States fell by 10.1% YoY. Much of this decline can be attributed to the 25% tariffs that have been placed on automobiles and auto parts.
Japan’s exports just suffered their worst drop in four years —clear evidence of the damage inflicted by these tariffs. In total, exports fell by 2.6% y-o-y and imports even by 7.5%. The effect of this dramatic change in trade dynamics is dangerous. Japan’s economy will need to continue adjusting to increasing tariffs and a cool down in overall global demand.
With the trade balance swinging negatively, it signals potential challenges ahead for Japanese manufacturers and exporters reliant on US markets. Specialists are watching closely to see how these changes will continue to impact Japan’s economic trajectory and growth prospects in the years to come.
Reserve Bank of New Zealand Implements Rate Cut
In a separate major move down under, the Reserve Bank of New Zealand (RBNZ) today unanimously voted to reduce the cash-rate by 25bp. This decision brings the Official Cash Rate down to 3.00%. This decision is on par with market consensus and reiterates the central bank’s determination to foster economic growth in the face of global uncertainties.
The RBNZ’s decision indicates a surging wave among central banks. They are increasingly copying accommodative monetary policies to fight very weak economic circumstances. Today, countries are faced with extreme inflationary pressures and global geopolitical turmoil. Central banks are understandably reluctant to act to promote growth while risking aggravating the deepening of these other, more dangerous problems.
The RBNZ’s move may have even bigger implications for global markets. It underscores a new global concern for more accommodative monetary policy, particularly as much of the global economy faces headwinds. Investors will pay special attention to the ripples from this rate change. They are particularly interested in understanding how it affects domestic economic performance and international financial markets.