The stock market sold off as hot jobs data and a ramp-up in Treasury issuance just a day after a U.S. credit downgrade caused traders to retreat following a US$6.5 trillion rally.

Equities fell across the board, with the S&P 500 notching its worst day since April. The tech-heavy Nasdaq 100 dropped 2 per cent after a surge that topped 40 per cent this year amid the artificial-intelligence frenzy. Nvidia Corp. and Tesla Inc. sank at least 2.7 per cent. Wall Street’s so-called fear gauge, the VIX, climbed the most in almost five months. Ten-year yields hit the highest since November, while the dollar rose against all of its developed-market peers.

To Dan Wantrobski at Janney Montgomery Scott, the stock market is seeing a “high-level consolidation” after a rally that included overbought conditions, 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 volatility over the next several months triggered by any number of potential catalysts such as Federal Reserve policy, rate volatility and tightening liquidity.

STEEPER YIELD 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 U.S. 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 per cent, 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 U.S. 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 U.S. 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.

U.S. 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 U.S. 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
• U.S. initial jobless claims, productivity, factory orders, ISM Services, Thursday
• Eurozone retail sales, Friday
• U.S. unemployment rate, non-farm payrolls, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.4 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 2.2 per cent
• The Dow Jones Industrial Average fell 1 per cent
• The MSCI World index fell 1.6 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.4 per cent
• The euro fell 0.4 per cent to US$1.0939
• The British pound fell 0.5 per cent to US$1.2714
• The Japanese yen was little changed at 143.38 per dollar

Cryptocurrencies

• Bitcoin fell 0.3 per cent to US$29,129.14
• Ether fell 0.5 per cent to US$1,840.77

Bonds

• The yield on 10-year Treasuries advanced five basis points to 4.07 per cent
• Germany’s 10-year yield declined two basis points to 2.54 per cent
• Britain’s 10-year yield was little changed at 4.40 per cent

Commodities

• West Texas Intermediate crude fell 1.9 per cent to US$79.81 a barrel
• Gold futures fell 0.4 per cent to US$1,971.70 an ounce