Stocks fell and bond yields rose, following hot jobs data and as the Treasury said it will ramp up its debt issuance just a day after the US was downgraded by Fitch Ratings.
(Bloomberg) — Stocks fell and bond yields rose, following hot jobs data and as the Treasury said it will ramp up its debt issuance just a day after the US was downgraded by Fitch Ratings.
The S&P 500 fell over 1% and was set for its biggest decline since April, while losses in the tech-heavy Nasdaq 100 topped 2%. The megacap space — which has driven this year’s gains in equities — underperformed, with Nvidia Corp., Amazon.com Inc. and Tesla Inc. each sinking more than 3%. Ten-year yields climbed toward the highest since November.
Dan Wantrobski at Janney Montgomery Scott, the equity market is seeing a “high-level consolidation” after a rally that included overbought conditions, high bullish sentiment and generally thinner breadth readings.
“While consolidation is generally considered a healthy phase on the way to resumption of previous trend, our outlook for the second half of 2023 has not changed materially at this time,” Wantrobski noted. “We are still on watch for a deeper correction.”
He also expects more elevated volatility over the next several months- triggered by any number of potential macro catalysts such as Federal Reserve policy, rate volatility and tightening liquidity as well as credit conditions.
Steeper Curve
Wall Street traders also had something else to worry about — a steeper yield curve — with rates on longer-term bonds rising faster than rates on shorter-term maturities.
Whenever the US curve has steepened in a significant way from an inverted position over the past 50 years, it has been followed by a meaningful drop in the equity market, according to Matt Maley at Miller Tabak.
“With this in mind, we’re not worried about the downgrade impact,” Maley noted. “There are some developments to be concerned about, including the recent rise in Treasury yields. The steepening of the yield curve — from an inverted position — is bearish, not bullish for the stock market.”
The steepening of the yield curve extended a trend since the Bank of Japan last week surprised markets with a policy tweak. At 4.92%, two-year yields are 82 basis points higher than those of the 10-year note. That’s compared to a gap of 102 basis points two weeks ago.
‘Lock In’ Profits
Fitch Ratings stripped the US of its top-tier rating, criticizing the ballooning fiscal deficit and an “erosion of governance.” The downgrade serves up an extra dose of uneasiness among investors already concerned about the risks of a recession and whether this year’s run-up in stocks is sustainable.
The US credit rating downgrade should not have been a surprise for investors that have been following Fitch’s comments, but the timing surely caught everyone off guard, according to Ed Moya at Oanda.
“Wall Street can’t ignore what is happening with fixed income as Treasury yields surge,” Moya added. “Equity traders are using this surge in yields and some nervousness ahead of Apple and Amazon’s earnings as an opportunity to lock in some profits.”
The next few hours will be key for risk appetite also because of Friday’s jobs data, which could sway markets in thinking we might need to see more Federal Reserve tightening, Moya added.
US companies added more jobs in July than expected, highlighting the persistent strength of the labor market, according to figures published Wednesday by the ADP Research Institute in collaboration with Stanford Digital Economy Lab.
Corporate Highlights
- American Airlines Group Inc. is in talks with Airbus SE and Boeing Co. to order at least 100 narrowbody jets to replace some of the oldest aircraft in its fleet, according to people familiar with the matter.
- CVS Health Corp. beat estimates for second-quarter profit and sales, a sign of strength as the drugstore chain cuts staff to reduce costs and focuses on broadening its health-care offerings.
- Advanced Micro Devices Inc. topped second-quarter estimates and touted inroads in artificial intelligence computing, putting it in closer competition with Nvidia Corp.
- Pinterest Inc. said revenue in the current quarter will rise in line with analysts’ estimates, disappointing some investors after digital-ad rivals posted surprisingly upbeat results last week.
- Starbucks Corp.’s quarterly sales fell short of analysts’ estimates as traffic growth slowed in the US. Higher prices and add-ons to beverages helped bolster profit.
Key events this week:
- China Caixin Services PMI, Thursday
- Eurozone S&P Global Eurozone Services PMI, PPI, Thursday
- Bank of England rate decision, Thursday
- US initial jobless claims, productivity, factory orders, ISM Services, Thursday
- Eurozone retail sales, Friday
- US unemployment rate, non-farm payrolls, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 1.2% as of 1:10 p.m. New York time
- The Nasdaq 100 fell 2%
- The Dow Jones Industrial Average fell 0.7%
- The MSCI World index fell 1.5%
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.3% to $1.0956
- The British pound fell 0.3% to $1.2734
- The Japanese yen rose 0.1% to 143.14 per dollar
Cryptocurrencies
- Bitcoin fell 0.5% to $29,072.48
- Ether fell 0.9% to $1,832.54
Bonds
- The yield on 10-year Treasuries advanced five basis points to 4.08%
- Germany’s 10-year yield declined two basis points to 2.54%
- Britain’s 10-year yield was little changed at 4.40%
Commodities
- West Texas Intermediate crude fell 2.6% to $79.28 a barrel
- Gold futures fell 0.3% to $1,973.30 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Brett Miller, Tassia Sipahutar, John Viljoen and Isabelle Lee.
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