Top tech stocks are in correction territory. Here’s why

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What’s happening: Tech companies are getting hammered by the recent sell-off in markets. Many stocks in the sector have entered a correction, logging declines of at least 10% from their recent peaks.

The tech-heavy Nasdaq Composite may not be far behind. The index finished Friday more than 8% below the record high notched on Feb. 12. Futures point to another rough trading session on Monday.

Breaking it down: Investors have become increasingly worried that the reopening of many big economies later this year will lead to a spike in prices as people rush out to restaurants and book vacations. That could put pressure on central banks like the Federal Reserve to hike interest rates sooner than expected.

Rock-bottom rates have been a boon for fast-growing tech companies. They’ve helped keep yields on government bonds extremely low, boosting interest in riskier investments like stocks that offer better returns.

But now, bond yields are rising on inflation concerns. That could make assets like US Treasuries start to appear more enticing — triggering outflows from the tech names that have been so popular over the past 11 months.

Jeroen Blokland, a portfolio manager at Robeco, thinks that as estimates for economic growth continue to improve, so-called “value” stocks in sectors like banking — which benefit from a healthy economy — may begin to get a second look.

“If you believe in this whole reopening and estimates of GDP growth … that means growth is less scarce,” he told me. “[Then the] value sector has at least the possibility to play catch up.”

See here: The KBW Bank Index, which tracks top US lenders, is up more than 20% this year. The Nasdaq, meanwhile, has almost wiped out all of its 2021 gains.

Many strategists think the declines are healthy, and that share prices of many tech companies shot up too much, too fast.

Continued selling may hinge on what we hear from central bankers in the coming days. The European Central Bank, which meets later this week, has stated clearly that it will take some action if it believes the rapid increase in bond yields will lead to tighter financial conditions. Fed Chair Jerome Powell has been less explicit.

Blokland thinks that if the yield on the 10-year US Treasury note marches significantly higher this week, Powell may have no choice but to strongly assert that the Fed will act as necessary to ensure the economic recovery isn’t affected by market turmoil.

“If we have another week like last week, [he has] to do something,” Blokland said.

Oil jumps above $70 per barrel after attack of Saudi facilities

Bolstering fears about inflation is the rapid run-up in oil prices.

The latest: Brent crude futures, the global benchmark, jumped above $70 per barrel on Monday for the first time since January 2020.

The gains came after Saudi Arabia reported that a drone and missile strike had targeted military sites and oil facilities, including petroleum tank farms at the Ras Tanura port, a crucial global terminal for oil exports. Yemen’s Houthi rebels have taken responsibility for the attack.

The state-run Saudi Press Agency has reported that the attacks did not result in any injuries or property damage.

But the incident was enough to push up oil prices, which have rallied in recent months after plunging early in the pandemic.

Remember: The Organization of the Petroleum Exporting Countries and allies said Thursday that they would largely roll over production cuts during the month of April. That bolstered expectations that supply would remain limited even as demand for energy starts to spike — a dynamic that would help prices remain elevated.

“This was the most bullish outcome we could have expected,” JPMorgan strategist Natasha Kaneva said in a note to clients.

Many analysts, however, thought it would take longer for oil to trade above $70 per barrel again. JPMorgan predicted that Brent oil prices would average between $68 and $69 per barrel this spring and summer before breaking above $70 per barrel in September.

Brent could struggle to hold the $70 level. But if crude prices remain this strong, it may force investors to rethink their positions — especially those worried that higher prices will force an intervention from policymakers.

Deliveroo’s IPO is a win for post-Brexit London

Deliveroo is going public in London, it confirmed Monday — a win for the city as it tries to hold on to its financial standing after Brexit.

The food delivery startup is planning a blockbuster offering, my CNN Business colleague Charles Riley reports. The company has seen business surge during the pandemic. Last year, the total value of transactions processed on the company’s platform increased by 64% to £4.1 billion ($5.7 billion).

Watch this space: The tech company still posted an underlying loss of £224 million ($310 million) in 2020, raising questions about its valuation. The listing is expected to value Deliveroo at more than $7 billion, according to Reuters, but other media reports have pegged the target at up to $10 billion.

“This valuation of Deliveroo seems eopxcessive for a business which is still many years from profit,” said John Colley, associate dean of Warwick Business School.

Regardless, the announcement will be touted as a win by the UK government.

Billions of dollars worth of stock and derivatives trading has vanished from London since the United Kingdom completed its exit from the European Union on Jan. 1. The business is being picked up by rival financial hubs in Amsterdam, Paris, Frankfurt and New York.

Eager to buck the trend, the UK government said last week that it would review rules that prohibit companies with dual class structures from joining major FTSE indexes. Deliveroo said Monday that it will list with dual class shares, replicating the structure that has allowed tech founders including Facebook’s Mark Zuckerberg to go public while maintaining control of their companies.

Up next

Stitch Fix (SFIX) reports earnings after US markets close.
Coming tomorrow: Earnings from Dick’s Sporting Goods (DKS) and H&R Block.

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