After a choppy morning on Wall Street, the main indices are still in the red.

Both the Dow Jones industrial average and the wider S&P 500 are down over 1%, in a fairly broad selloff.

Consumer discretionary stocks are the worst-performing sector, followed by materials producers, industrial stocks and technology companies.

The Nasdaq Composite has recovered a little, but is still down 1.5% today - and over 6% so far this year.

Danni Hewson, AJ Bell financial analyst, says investors seem to have finally priced in the prospect of US rate rises, after months of rising inflation and increasingly hawkish noises from the Federal Reserve.

The fallers present as a who’s who of tech sector darlings with Amazon, Tesla, Etsy and Peloton among those taking a hit. But it’s not just tech that’s bearing the brunt of today’s rout, investors are beginning to think of “growth” as a negative, realisation setting in that those money makers of the past few years will be weighed down by added baggage.

“Taper tantrum, manic Monday, whatever label you want to put on today’s carnage the real story will be played out over the rest of the week. Are investors just having a quick panic that will be followed by a deep breath and a spot of bargain hunting or are investors really rattled by what the next twelve months are set to bring? Rate rise rhetoric tends to lead to knee jerk reaction followed by a period of reflection, but with more inflation data hurtling towards us, this week could be unsettling at best.

A reminder of the impact of the UK government’s £4bn cladding package on UK housebuilders:

Worries about the impact of a rise in interest rates on the value of future earnings are threatening to turn into a painful reckoning for many tech investors, says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown:

The Nasdaq composite index slipped by as much as 4% in early trade, before stemming some losses and is down by around 10% from its November high. Apple retreated further away from the nascent 3 trillion dollar club, falling 2%.

Chip maker Nvidia and Mastercard registered falls of more than 5% before recovering slightly. Amazon joined the downward trajectory, slipping by 3.6% in early trade.

On the FTSE 100, Scottish Mortgage Investment Trust, which holds a raft of tech darlings like Tesla, Nio and Amazon was among the biggest fallers amid concerns the tech juggernaut is slowing. With other companies in the big data and payments space slipping back, information analytics firm Experian fell lower, ending the day down by more than 5% .

The question facing investors today is whether to sell long term winners to buy into the short-term recovery bounce, says David Miller, executive director of Quilter Cheviot Investment Management.

In his latest Diary of a fund manager, Miller explains that the answer depends on an investor’s perspective, and their optimism about a return to the pre-covid days.

(Some will be sticking with ‘growth’ stocks for their long-term potential, while others will be shifting into ‘value’ companies who suffered during the pandemic)

Setting aside the short-term noise, Miller adds, the major assumptions of this year are that;

• The global economy will continue to grow, not quite as fast as last year which was the best for 40 years, but still above average.
  
  
• The US Federal Reserve will increase interest rates three times during the year, but only by fractions. If economic growth falters, it will back away from being tough.
  
  
• Geopolitical hotspots will continue to be more bluff than action.
  
  
• Covid will remain a problem, but not worse.

Here’s Fawad Razaqzada, analyst at ThinkMarkets, on today’s drop in technology stocks and cryptocurrencies:

Investors are wondering what 2022 means for assets inflated with government and central bank liquidity during the pandemic, with technology and cryptocurrencies being the obvious focal points.

So far, they have shown a clear desire to move into value and away from low-div-yielding stocks, as bond yields climb across the board as we get closer to the time of lift off. Investors are pricing in a Fed hike in as early as March.

Gold’s struggles are a side effect of investors’ desire for higher yielding assets and the US dollar. The precious metal has been unable to find much haven flow despite the crypto and tech sell-off.

The markets are throwing a tantrum about the prospect of higher US interest rates, says Callie Cox, investment analyst at eToro:

Megatech stocks are under pressure today.

Apple is down 2% today, Alphabet (Google) and Microsoft have both lost 2.6%, while Meta (Facebook) has tumbled 4.4%. Tesla is 3% lower, Amazon has dropped 3.3%, while graphics chip-maker Nvidia has slid over 5.5%.

Ouch. The technology-focused Nasdaq Composite is now in correction territory.

The index has dropped by more than 10% from its record high in November, as Wall Street has priced in higher US interest rates.

European markets have dropped deeper into the red too, as the risk-off mood hits equities.

In London, the FTSE 100 index is now down 45 points or 0.6% at 7440, retreating from last week’s 22-month highs.

Steam engineering group Spirax-Sarco are the top faller (-6%), followed by tech investor Scottish Mortgage Investment Trust, which is suffering from the technology selloff in New York.

The pan-European Stoxx 600 index is now down 1.3%.

The Nasdaq Composite index has hit its lowest level since mid-October.

Wall Street’s selloff is gathering pace, with the Nasdaq Composite now down over 2%.

Worries about a possible rise in US interest rates, and anxiety over the impact of the pandemic, are both hitting shares today, says Bloomberg:

Technology companies led stock losses in another leg down for pricey growth shares under threat from rising rates and inflation. Some corporate warnings about the negative impacts of the omicron coronavirus variant also soured sentiment.

The Nasdaq 100 dropped about 2%, while Treasury 10-year yields climbed to 1.8%. Lululemon Athletica Inc. tumbled as the maker of yoga pants said omicron was constraining its operations, while Torrid Holdings Inc. plunged after the plus-size women’s clothing retailer cut its sales forecast as the variant caused disruptions to its workforce.

Bitcoin fell for the fifth time in six sessions, putting it on pace for the worst start to a year since the earliest days of the digital alternative to money.

Markets are facing higher volatility as the pandemic liquidity that helped drive equities to record highs is withdrawn. The Federal Reserve will likely raise interest rates four times this year and will start its balance-sheet runoff process in July, if not earlier, according to Goldman Sachs Group Inc. [see earlier post].

A key measure of U.S. inflation -- set to be released Wednesday -- is anticipated to have increased further in December.

Bitcoin has dropped through the $40,000 mark for the first time since last September.

It’s down around 4% today at $39,906, or over 40% off its record high (above $68,000) set in November, as worries about higher US interest rates hit risky assets.

Wall Street is bracing for US inflation to potentially hit 7% on Wednesday, up from the 38-year high of 6.8% recorded for November.

Mohamed El-Erian, chief economic adviser at Allianz, has predicted we could see a ‘7-handle’ on US CPI:

Fiona Cincotta, senior financial markets analyst at City Index, says another inflation increase could lead to a US interest rate rise in March:

US stocks are set to open lower as investors fret over rising inflation and the Fed hiking interest rates at the same time that Omicron cases are surging higher.

US treasury yields rose to a fresh 2 year high amid growing expectations that the Fed will tackle surging inflation head on this year raising rates at a faster pace than initially expected.

Tech stocks, which are particularly sensitive to higher interest rate expectations are once again under performing as investors rotate out of high growth stocks into value, with bank stocks rising on the prospect of a rate hike boosting net interest income.

Whilst there is no high impacting US data due for release today attention is firmly on US inflation data and a speech by Fed chair Powell later in the week. Inflation is expected to come in at 7%, which could prompt more hawkish commentary from the Fed, cementing the way to a rate hike potentially as soon as March.

Wall Street is set to open lower, as worries about potential US interest rate rises hit growth stocks.

Nasdaq futures are down 1%, as technology stocks are hurt by expectations of a high interest rate environment.

Bank stocks, though, are benefitting from rate hike bets, with US. Treasury yields (the interest rate on US government debt) trading at two-year highs.

Covid-19 spurred wealthy motorists to buy more Rolls-Royces than ever before because it made them realise life is short, the luxury carmaker has said.

As global cases escalated in 2021, Rolls-Royce Motor Cars, based in Goodwood, West Sussex, booked the highest annual sales in its 117-year history, selling 5,586 vehicles.

The company’s chief executive, Torsten Müller-Ötvös, said the pandemic had led to customers, whose average age was 43, responding to the reminder of their own mortality by splashing out on luxury cars.

“Many people witnessed people in their community dying from Covid and that made them think life can be short and you’d better live now rather than postpone until a later date,” said Müller-Ötvös. That has helped Rolls-Royce.”

He said the carmaker, owned by BMW, had also benefited from the restrictions the pandemic had placed on wealthy consumers’ opportunities to spend their money elsewhere.

“It is very much due to Covid that the entire luxury business is booming worldwide.

People couldn’t travel a lot, they couldn’t invest a lot into luxury services … and there is quite a lot of money accumulated that is spent on luxury goods.”

Goldman Sachs analysts have predicted that the Federal Reserve will likely raise US interest rates four times this year, due to steep inflation and the recovery in the jobs market.

They also anticipate the Fed will start its balance sheet runoff process in July, if not earlier as Bloomberg explains:

Rapid progress in the U.S. labor market and hawkish signals in minutes from the Dec. 14-15 Federal Open Market Committee suggest faster normalization, Goldman’s Jan Hatzius said in a research note.

“We are therefore pulling forward our runoff forecast from December to July, with risks tilted to the even earlier side,” Hatzius said.

“With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike. We continue to see hikes in March, June, and September, and have now added a hike in December.”

Back in the City, housebuilders are still under pressure as the government laid out plans to make developers help cover the cost of the UK’s cladding crisis.

Persimmon (-4.9%) is still the top FTSE 100 faller, as investors digest the situation, as Newsnight’s Ben Chu tweets:

Despite nearing a record low in November, eurozone unemployment (7.2%) is still higher than in the UK (4.2%) and the US (3.9%).

The Financial Times points out there are few signs that wage increases for European workers are as large as those for their American counterparts, adding:

The recent rebound in the eurozone economy is expected to slow because of restrictions to contain the Omicron variant.

But Jack Allen-Reynolds, senior Europe economist at Capital Economists, said: “If we are right that activity will start to pick up again in February and March, any impact on the pace of hiring should be shortlived.”

The pound has climbed to its strongest level against the euro since the start of the pandemic.

Sterling hit €1.1995 this morning, the highest since February 2020, despite this morning’s encouraging fall in eurozone unemployment.

The pound has rallied in the last month, lifted by optimism that omicron will not derail the economic recovery despite the hit to hospitality in the run-up to Christmas.

It means one euro is worth 83.33p, as this chart from interactive investor’s Victoria Scholar shows.

Shares in travel and hospitality firms have risen this morning, on hopes that the pandemic may be easing.

British Airways parent company IAG (+2.4%), conference organiser Informa (+1.4%), budget airline easyJet (+3.7%) and Wizz Air (+2.9%), cinema operator Cineworld (+6.5%) are among the risers in London.

This follows signs that omicron is less severe than the Delta variant of Covid-19, following record numbers of cases in the UK in recent weeks.

Luca Paolini, chief strategist at Pictet Asset Management the economic recovery remains resilient despite the restrictions introduced to combat Omicron.

The global recovery remains resilient, thanks to a strong labour market, pent-up demand for services and healthy corporate balance sheets.”

Given our positive outlook for the economy, we are looking for opportunities to raise our weighting in stocks in 2022.”

The global economy is on track to grow 4.8 per cent in 2022 with the US experiencing a strong recovery in both manufacturing and services.”

That could mean US interest rates rise this year, potentially creating turbulence in emerging economies and some volatility in the financial markets.

Paolini explains:

Price pressures are more persistent than expected, however. Inflation is still running way above the central bank’s official target. We expect core inflation to peak in early 2022, which should prompt the US Federal Reserve to raise interest rates by as early as June 2022.”

Here’s AJ Bell investment director Russ Mould on this morning’s early market action.

“Despite some tentative positivity in Asian trading, the UK index was not helped by a weak start for the housebuilding sector.

“The UK Government is reportedly looking for property developers to take on a greater share of the costs of repairing dangerous apartment blocks in the wake of the Grenfell tragedy in 2017.

“Many flat owners have been left with onerous costs for replacing flammable cladding and the latest reports on who will foot the bill should come as no surprise to the sector in that context.

“The housebuilders have benefited from generous incentives, such as Help to Buy and the mortgage guarantee scheme, in recent years. However, state support is not a one-way street and the sector needs to do its bit to look after its customers.

“With a quiet start to the week for big corporate and economic announcements, markets could remain in a holding pattern until Wednesday when US inflation figures will reveal just how acute inflationary pressures are in the world’s largest economy.”

Another important housing story...Britain faces a crisis in the wake of the pandemic as confusion about planning rules and shortages of staff undermine government targets to build 300,000 homes a year.

A retreat from housebuilding by smaller companies must be tackled by ministers to reduce the shortage of homes, according to a House of Lords committee.

A report, titled Meeting Housing Demand, warned:

“Too many people currently live in expensive, unsuitable and poor-quality homes, and housing supply needs to be increased now to tackle the housing crisis.

Here’s the full story:

European stock markets have started the week in the red.

The FTSE 100 index has dipped by 10 points, or 0.12%, while Germany’s DAX and France’s CAC are both 0.5% lower.

Jitters about the prospect of higher US interest rates continue to weigh on markets, as Victoria Scholar, head of investment at interactive investor, explains:

“Choppiness continues this week with European markets initially opening in the green before shifting into the red. Oil & gas is outperforming while household goods are under pressure. There’s no shortage of risk events for the week ahead including US inflation data, earnings from the US financial giants and comments from Fed Chair Jay Powell.

After opening flat, the FTSE 100 is giving back almost 0.5% with the next major support level at 7,450. The DAX and the CAC have swung from gains to losses this morning with a nervous overhang after last week’s volatility capping any notable gains.”

In the City, shares in UK housebuilders have dropped after the government ordered the industry to pay £4bn to help remove dangerous cladding from buildings.

In a letter to property developers this morning, secretary of state for levelling up, housing and communities Michael Gove said they must help foot the bill, following the Grenfell Tower disaster in 2017.

“It is neither fair nor decent that innocent leaseholders, many of whom have worked hard and made sacrifices to get a foot on the housing ladder, should be landed with bills they cannot afford to fix problems they did not cause,”

Gove is unveiling the £4bn package today to help leaseholders escape the onerous costs involved in replacing combustible cladding. Those who live in blocks between 11m and 18m tall will no longer face crippling bills, which had run into tens of thousands of pounds.

Speaking on the BBC Today programme (after being freed from the Broadcasting House lift), Gove explains that the big housebuilders have all been making significant profits, so need to make a fair contribution to the cost of replacing Grenfell-style cladding.

Housebuilders are leading the FTSE 100 fallers, with Persimmon (-3.6%), Barratt Development (-3.2%), Taylor Wimpey (-3%) Berkeley Group (-2.8%) all weaker.

The government expects that all developers responsible for affected buildings with annual profits from housebuilding of at least £10m will be in the frame for paying up under the new plan.

Gove is giving developers until March to come up with a fully funded plan for resolving the cladding crisis. Otherwise, ministers could restrict access to government funds and future procurement if they fail to act, or legislate to force them to pay up.

Housebuilders had already set aside funds for cladding issues, and already face a levy on profits to address the problem. The industry argues that other organisations are also involved in the construction of affected buildings, including housing associations, local authorities, and the manufacturers who produced materials that weren’t fit for purpose.

Campaigners have warned that leaseholders face other serious fire-safety problems, and massive costs to fix. That includes defective fire doors, flammable balconies and missing firebreaks because of non-compliant building works. Here’s the full story.

The prospect of America raising interest rates, and unwinding its bond purchase stimulus programme, is weighing on global markets - so the IMF’s blogpost is well-timed.

Shares, and other riskier assets such as bitcoin, fell last week, as investors anticipated that the Federal Reserve could unwind its balance sheet sooner and faster than expected.

Sovereign bond prices have also fallen, driving up the interest rates on government debt, as traders anticipate the Fed lifting rates and reducing its holdings of US Treasuries during 2022.

Jim Reid of Deutsche Bank says it’s been a dramatic start to the year:

To be fair the Fed were starting to catch up with reality late last year but Omicron meant that the market was reluctant to read their more hawkish move as entirely realistic given the risks that the variant presented.

However the holiday season provided more evidence that Omicron was notably milder, especially amongst the vaccinated, and the result has been that the market has looked through this more than they were willing to before Xmas whilst at the same time the Fed have become even more hawkish by upping the ante on QT. So a perfect storm.