US equities pulled back from their largest daily gains in nearly nine months as concerns about inflated valuations began to weigh on investor confidence.
The S&P 500 closed 0.8 percent lower, one day after the blue chip index’s best performance since June. The tech-focused Nasdaq Composite was down 1.7 percent, falling from a 3 percent rally on Monday.
“Markets seem to oscillate between optimism and pessimism, which is not uncommon given that there are so many variables,” said Grant Bowers, a portfolio manager at Franklin Templeton.
While positive vaccine news and Washington’s $ 1.9 billion stimulus package coming within reach are strong signs of a rapid economic recovery, concerns about foamy stocks have increased among traders and policymakers.
“We have reduced our exposure to specific names trading at very high valuations, mostly within the Nasdaq,” said Kevin Thozet, investment committee member at French investor Carmignac.
Some Wall Street high-flyers led the decline on Tuesday, with electric carmaker Tesla pushing 4.5 percent. Shares in streaming technology provider Roku tumbled 7.3 percent, and video conferencing platform Zoom was down 9 percent by the time the closing bell rang.
The decline in US equities followed a tough session in Asia, after the Chinese bank regulator also raised concerns about high valuations in foreign markets. The Hong Kong benchmark Hang Seng index closed 1.2 percent lower, while the Chinese CSI 300 index of Shanghai and Shenzhen stocks lost 1.3 percent.
“I fear the bubble problem in foreign financial markets will one day burst,” said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, at a briefing in Beijing to local media. He pointed to gains in the US and European markets, made possible by a very loose monetary policy, which he said had “deviated significantly” from the real economy.
“The Chinese market is now strongly linked to foreign markets and foreign capital continues to pour in,” Guo said, according to the state-sponsored Securities Times in China, in a nod to global investors’ hunger for Chinese stocks and bonds. He added that while China can handle the scale and speed of inflows, “we need to avoid volatility [China’s] the domestic financial market does not become too large ”.
In Europe, the regional Stoxx 600 closed a 0.2 percent rise, building on the benchmark’s best performance in four months on Monday. The FTSE 100 index in London was up 0.4 percent, while the Xetra Dax in Frankfurt was up 0.2 percent.
The continent’s bonds stabilized after more than a week of turbulent debt trading. The yield on the German 10-year Bund rose by 0.01 percentage point to minus 0.35 percent, after falling 0.07 percentage point a day earlier.
But unrest over the relationship between loose monetary policy and market performance remains a concern in Europe.
“Last year, the story that drove the markets was easy monetary policy and fiscal support,” Thozet said. “The question is how long will this take? Central bankers say they will keep a lenient monetary policy, but what we see, especially in the EU, is that they are not using all the tools at their disposal. “
According to data released Monday, the European Central Bank bought € 12 billion worth of bonds under its pandemic emergency purchase program in the week to Wednesday last week, which had fallen from € 17.3 billion the previous week and below the weekly average of € 18.1 billion since the program began in March last year.