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Global stock markets on track for worst week in more than a year

Global equities headed for their worst week in more than a year as heavy losses in Netflix shares accentuated a sell-off in tech stocks that began to spill into other sectors.

Investors have raced out of speculative corners of the market as the Federal Reserve moves to tighten financial conditions. Share declines have been particularly extreme in the US, where many of last year’s high-flying tech companies are listed.

The tech-heavy Nasdaq Composite index has fallen 6.2 per cent this week, its biggest slide since the coronavirus pandemic rocked US financial markets in March 2020.

The blue-chip S&P 500 index, the closely followed barometer of the $50tn US stock market, has shed 4.9 per cent over the past week. More than 60 per cent of the companies within the index are now in a technical correction — or down at least 10 per cent from their record high — including 130 stocks that have declined 20 per cent or more.

The FTSE All-World index of developed and emerging market shares has fallen about 3.5 per cent since last Friday, leaving it on course to record its steepest weekly decline since October 2020.

The drawdown in equity markets prompted many investors to buy derivatives to hedge themselves from further declines. Put option volumes in the US, which can pay off if a stock or index falls in value, surged above 23m contracts late in the trading day. The level of activity made Friday one of the five busiest put option trading days on record, with more than an hour of the session remaining.

Among the hardest hit US stocks was Netflix, which tumbled 21 per cent on Friday after the streaming group warned that subscriber growth would slow substantially. The tumble shaved about $45bn from its valuation, or roughly the market capitalisation of foods group Kraft Heinz.

“Some kind of contagion from tech to the rest was inevitable at some point,” said Luca Paolini, chief strategist at Pictet Asset Management. “When you have these kinds of losses they affect sentiment and everything else goes down.”

The shift out of highly valued and fast-growing companies such as Netflix on Friday marked the latest stage of a pullback that has reverberated across global financial markets, as investors grapple with a US central bank that is dramatically shifting monetary policy.

Traders expect the Federal Reserve to raise interest rates four times this year and to end other stimulus measures that had helped propel stock markets since the start of the pandemic. That pivot from the Fed has been acutely felt in the $22tn Treasury market, the backbone of the global financial system and the market that serves as a gauge for which all other assets are priced.

Yields on Treasuries have shot higher this year, prompting a powerful stock market rotation out of tech stocks and into shares of businesses whose fortunes are pegged to the economic rebound from the shocks of coronavirus.

Those higher yields have damped the appeal of so-called growth stocks, whose valuations are reliant on future profits that will not be earned for many years.

Even as Treasury prices firmed on Friday, extending a rally that began in the previous session, the so-called 10-year real yield continued to rise, briefly hitting minus 0.54 per cent, its highest level since February 2020.

Line chart of 10-year US Treasury real yield (%) showing Real yields have spiked as investors ready for Fed rate rises

Other assets that had been in vogue have also had a turbulent start to the year as real yields have surged from minus 1.1 per cent at the end of 2021. Bitcoin, a highly speculative asset that reached an all-time high in November 2021, has fallen 17 per cent in 2022 while an index of unprofitable tech stocks collated by Goldman Sachs has shed a fifth of its value over the same time period.

“The equity market has become very bearish [over the prospect that] the Fed will be forced to act,” added Jim Tierney, a fund manager focused on growth stocks at AllianceBernstein. “The Fed has never in the last 20 years — in most of our investing careers — been hyper hawkish, but the market now is pricing in the idea that they are going to have to be.”

Stock markets also fell across Europe, with the regional Stoxx 600 equity gauge falling 1.4 per cent for the week, its third consecutive weekly loss.

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