US stocks lost ground on Wednesday following a rocky trading session, with yields on Treasuries and the dollar both climbing.
The benchmark S&P 500 index, which slipped 0.5 per cent, slid into negative territory in the final hour of the trading day despite confirmation from policymakers at the Federal Reserve that they would keep interest rates low for the years to come.
The losses were centred in the technology industry, with shares of Apple, Amazon and Facebook all declining more than 2 per cent. The slide in technology stocks weighed on the Nasdaq Composite, which fell 1.3 per cent.
The majority of companies within the S&P 500 still ended the day higher, with the shares of banks and energy companies including ExxonMobil, Wells Fargo and Citigroup advancing.
US Treasuries slipped following the Fed decision and comments from chairman Jay Powell that the pace of the US economic recovery would eventually slow. The yield on the 10-year Treasury rose 2 basis points to 0.69 per cent. Yields rise as bond prices fall.
The dollar, which was hovering near two-year lows, climbed alongside the move in Treasury yields. The dollar rose 0.3 per cent against the euro.
The adoption by the Fed’s policy setting committee of a new average inflation target “moderately above 2 per cent” puts in place an approach that is more dovish than the US central bank’s previous regime. The Federal Open Market Committee noted that it would “maintain an accommodative stance” until it hit that target.
The Fed also predicted that the US economy was recovering faster than it expected at the outset of the coronavirus pandemic. It said it now predicted an economic contraction of 3.7 per cent this year, compared with a decline of 6.5 per cent previously.
Still, data released on Wednesday showing that US retail sales growth lost momentum in August highlighted the choppy economic recovery from the pandemic.
“Despite an initial risk-on sentiment that followed the Fed, the most enduring takeaway was a collective sense of disappointment,” said Ian Lyngen, a strategist with BMO Capital Markets. “The forward guidance changes fell short of triggering reflationary ambitions and even the initial bounce in equities faded.”
The Fed’s dovish monetary policy has nonetheless been “incredibly supportive” for stock markets and should remain so, said Yuko Takano of Newton Investment Management. This, she added, was somewhat “scary as valuation levels are too high”.
The S&P 500 has risen more than 50 per cent since March 23, with much of the rally powered by technology stocks. Despite the pullback from a record high set earlier this month, the index traded on Wednesday at 22 times its expected earnings for the next year. Before the market rally this year, the index had not traded at a multiple that high since the dotcom bubble burst.
Ms Takano said she also expected stock markets to be volatile in the coming months as investors’ “arguments swing between valuations, macroeconomics and politics”.
China’s policymakers on Wednesday permitted the nation’s tightly controlled currency to strengthen by a further 0.3 per cent, building on gains it had made on Tuesday to hit a 16-month high of Rmb6.7613 against the dollar.
Demand for the renminbi has been strengthened by flows of dollars into the country, according to analysts at the Japanese bank Nomura. This is partly because Chinese exporters — which have some choice over whether they leave their dollar revenues abroad or take them back into China to convert to renminbi — are bringing more foreign currency home.
The Chinese economy has improved in recent months as coronavirus cases faded and the nation’s government eased its strict lockdown and quarantine rules. China’s retail sales grew in August for the first time this year, official data showed.
Growing interest among overseas investors for the renminbi-denominated debt issued by the Chinese government, banks and companies would also bring more dollars into China, the Nomura team noted.