The tech-heavy Nasdaq took another dive overnight as bond yields itched higher. This could once again drag on ASX 200 tech shares on Tuesday.
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The US market experienced yet another strange session overnight with the Nasdaq Composite (NASDAQ: .IXIC) falling by 2.41% while the S&P 500 Index (SP: .INX) fell only 0.54% and the Dow Jones Industrial Average Index (DJX: .DJI) closed 0.97% higher. The significant slump in tech and growth sectors could put pressure on ASX 200 tech shares.
Benchmark US government yields were once again in the spotlight, edging slightly higher to close at 1.60%. Yields have now more than tripled since August 2020 lows of 0.50%.
Why do yields matter?
Record-low and near-zero yields, or interest rates, have helped the stock market and the broader economy in a number of ways.
Lower interest rates translate to lower borrowing costs, which can prop up economic activity.
As interest rates get lower, investors must also take on more risk to maintain the same returns. It can therefore translate into a flow of funds from low-risk assets such as bonds, into higher-risk assets such as equities.
Interest rates also impact the theoretical value of companies and their share prices. A company’s fair value is its projected future cash flows discounted to the present. If interest rates fall and everything else is held constant, the share price should rise. Conversely, if interest rates go higher, then share values should fall.
Tech shares, many of which are not yet profitable, rely on more earnings in the future. Its rich valuation makes it more vulnerable to an increase in the yield used to discount its earnings. Whereas cyclical, or more value orientated shares such as financials, commodities and real estate tend to do better in high interest environments.
The pressure is on for ASX 200 tech shares
Yesterday, ASX 200 tech shares attempted to open higher but finished the session in the red. The S&P/ASX 200 Info Tech (INDEXASX: XIJ) opened as much as 3% higher on Monday, but closed 1.14% lower.
Today, the tech index is down as much as 5%%, bringing its 5-day performance to -10.10% and 1-month performance to -21.03%.
Weighing down the index include ASX 200 tech share giants Afterpay Ltd (ASX: APT), which is down 10%, Xero Limited(ASX: XRO), down 7%, and Wisetech Global Ltd (ASX: WTC), which is down 4.3% at the time of writing.
Computershare Ltd (ASX: CPU) was the only large-cap that managed to open in the green and is currently up 2.80%.
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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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