Stocks suffered another sharp pullback Monday, with the technology sector taking the biggest blows, as investors confronted concerns about inflationary pressures and growing global economic risks.
Crude oil prices rose to seven-year highs, doing little to help investors shake a sense that inflation will be sticking around for some time to come. The rally came as OPEC and allied oil producers stuck to a plan for cautious production increases even as global demand for crude is on the upswing.
While the rise in oil helped to limit losses for Canada’s energy-heavy benchmark stock index, the Nasdaq - with its heavy weighting of technology stocks that are particularly vulnerable to rising inflation and bond yields - closed down 2.14 per cent to its lowest level since June.
“From power shortages in China, to gas station lineups in Britain, to the fastest German CPI in nearly three decades, inflation is starting to overshadow the pandemic as the biggest threat to the expansion, and more central banks are eying the stimulus exits,” Bank of Montreal economists said in a note.
Investors are also worried about the potential for renewed U.S.-China trade tensions and the need to raise the U.S government’s debt ceiling as the country faces the risk of a historic default in two weeks.
Fresh data Monday from the Commerce Department showed that new orders for U.S.-made goods accelerated in August by 1.2 per cent, pointing to sustained strength in manufacturing. Orders have now increased for four straight months.
But shortages held back shipments of factory goods, which barely registered a 0.1 per cent gain in August after advancing 1.5% in July.
Manufacturing is still being hobbled by global supply-chain issues, while data last week showed high inflation sharply cut U.S. consumer spending in July, with a moderate rebound in August.
“The negatives are building and have been building for the last several weeks during this bit of a downturn that we’ve seen,” said Tim Ghriskey, chief investment strategist at Inverness Counsel.
Top U.S. trade negotiator Katherine Tai pledged to unwind some tariffs imposed by former President Donald Trump on goods from China while pressing Beijing to keep its promises.
Ms. Tai said Washington seeks to stop China from pouring billions of dollars of state subsidies into its semiconductor, steel and other industries.
Meanwhile, U.S. Treasury yields rose as the market fretted about the debt ceiling. Biden said he cannot guarantee the government won’t breach its US$28.4 trillion debt limit unless Republicans join Democrats in voting to raise it.
The yield on 10-year U.S. Treasury notes rose 1.4 basis point to 1.4806 per cent, but was still below its highs of last week.
Francois Savary, CIO of Swiss wealth manager Prime Partners, said markets were increasingly pricing in a stagflation scenario of lackluster growth and high inflation, a headwind for stocks which have scaled a series of record highs and trade at expensive multiples.
“You can live with highly valued markets if you have the prospect of economic growth ahead. But if you think stagflation is becoming an issue and the only option is to tighten policy and kill economic activity, that’s not good for equities,” Mr. Savary said.
U.S. oil settled up $1.74, or 2.3%, to $77.62 a barrel after gaining for the past six weeks, and was at its highest since 2014.
OPEC+ confirmed it would stick to its current output policy as demand for petroleum products rebounds, despite pressure from some countries for a bigger boost to production.
OPEC+ agreed in July to boost output by 400,000 barrels per day (bpd) each month until at least April 2022 to phase out 5.8 million bpd of existing production cuts.
The oil price rally has also been fueled by an even bigger increase in natural gas prices, which have spiked by 300 per cent in Europe, prompting switching to fuel oil and other crude products to generate electricity and for other industrial needs.
Investors were also keeping a close eye on China and developments surrounding its debt-saddled property developer Evergrande. Chinese media Monday said the company was set to raise more than US$5 billion by selling a majority stake in its property management arm, a deal which would be the struggling giant’s largest asset sale yet if it goes ahead. Evergrande on Monday said it requested a halt in the trading of its shares in Hong Kong pending an announcement about a major transaction.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 98.62 points, or 0.5%, at 20,052.25, its lowest closing level since July 20. Technology stocks fell 2.8%, tracking declines for the tech-heavy Nasdaq composite index. Limiting the Toronto market’s losses on Monday were energy stocks, which rose 2% to the highest since January last year.
The TSX fell 2.5% in September, ending a run of seven straight monthly gains.
The Dow Jones Industrial Average fell 0.94% to end at 34,002.92 points, while the S&P 500 lost 1.30% to 4,300.46.
The Nasdaq Composite dropped 2.14% to 14,255.49.
Facebook, the fifth most valuable company, slumped almost 5% after its app and its photo-sharing platform Instagram were down for thousands of users, according to outage tracking website Downdetector.com. A day earlier, a former employee of the tech giant told “60 Minutes” that the company has consistently chosen its own interests over the public good.
The S&P 500 has now fallen about 5% from its record high close on Sept. 2. However, over half of S&P 500 stocks have declined 10% or more from their 52-week highs, including 71 stocks down more than 20%.
With files from Reuters and The Associated Press
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Darcy Keith