The interest rate-sensitive real estate and utilities sectors suffered on Friday after atop policymaker at the Federal Reserve argued that a “reasonable case” could be made for a rate rise ahead of the central bank’s monetary policy meeting this month.
Investors rotated out of the utilities sector, which declined 3.8 per cent, as markets began to reprice a move by the Fed as early as this month.
Speaking in Massachusetts, Eric Rosengren, president of the Boston Fed and a member of the monetary policy setting Federal Open Market Committee, said that, based on recent economic data, “a reasonable case can be made for continuing to pursue a gradual normalisation of monetary policy”, while also cautioning that low rates risked overheating the US economy.
That, in turn, saw the market-implied odds of a September rate rise meeting rise 10 percentage points from Thursday to 38 per cent.
Dividend-paying utilities, which benefit in a low interest rate environment, have climbed nearly 13 per cent so far this year as the central bank found itself in a cycle of promising more interest rate rises than it could deliver.
But Mr Rosengren’s remarks knocked some of the wind out of its rally this year.
Shares in NRG Energy fell 6.6 per cent to $11.60, AES Corp shares slid 4.8 per cent to $12.33 and Dominion Resources shares fell 3.9 per cent to $72.50 — and were among the biggest laggards on the index.
Investors also soured on the newly minted S&P 500 real estate sector, sending it 3.9 per cent lower for the steepest decline on the benchmark index.
The sector, which consists of real estate investment trusts and real estate management and development companies, is also favoured for the high dividend yields it offers.
Shares in Ventas Inc fell 5.6 per cent to $68.86, American Tower shares fell 5.2 per cent to $110.19, and shares in Welltower shed 4.7 per cent to trade at $73.75.
Meanwhile, the financials sector on the S&P 500 was down 1.4 per cent, while the regional banks subsector was off 0.6 per cent.
Rising interest rates are a positive for banks’ net interest margins — the gap between what banks earn in interest income and the rates they pay.
Among banks, Zions Bancorp shares were down 0.39 per cent to $30.57, M&T Bankrose 0.76 per cent to $117.09, while Bank of America shares slipped 0.76 per cent to $15.74.
The remarks also weighed on gold prices — as the precious metal offers no yield and is sensitive to swings in the US dollar — and prompted a sell-off in shares of gold miners.
Shares in Barrick Gold fell 4.8 per cent to $17.53, Kinross Gold shares fell 6.11 per cent to $4.15, while Newmont Mining shares declined 5.5 per cent to $39.30.
The S&P 500 tumbled more than 2 per cent to 2,127.81, the Dow Jones Industrial Average fell 2.1 per cent to 18,085.45 and the Nasdaq Composite fell 2.5 per cent to 5,125.91.
[Source:-Financial Times]
