QQQ Churns in Late Hours on Apple, Amazon Earnings: Markets Wrap

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(Bloomberg) -- Stocks fell as the selloff in the world's biggest bond market deepened ahead of the jobs report, which is expected to provide clues on the outlook for the Federal Reserve's next steps.

In late trading, a $207 billion exchange-traded fund tracking the Nasdaq 100 (QQQ) whipsawed after Amazon.com Inc.'s bullish revenue forecast and Apple Inc.'s disappointing iPhone sales. Another slide in longer-dated Treasuries put them on pace for their worst week of 2023 amid signs of unexpected economic strength and concern over a widening budget deficit.

A report Thursday underscored resilient demand for workers, while separate numbers showed productivity jumped the most since 2020, blunting labor costs. Those figures preceded the government's employment data — forecast to show the US added 200,000 jobs in July. While that would be the weakest print since the end of 2020, it's still a strong advance historically.

“The good news is that almost everyone agrees that an imminent recession isn't very likely,” said Ed Yardeni, founder of his namesake research firm. “That reduces the downside concerns about corporate earnings, but it increases the downside potential for the stock market's valuation multiple if the bond yield continues to rise.”

Bill Ackman, founder of Pershing Square Capital Management, said he's short 30-year Treasuries “in size” — as both a hedge against the impact of higher long-term rates on stocks and also as a standalone bet. Bill Gross, the one-time king of the bond world, noted he's “overall bearish” on 10-year yields, while Berkshire Hathaway Inc. Chairman Warren Buffett told CNBC he had been buying Treasury bills and would likely continue. Tesla Inc.'s chief Elon Musk said that short-term T-bills are “a no-brainer.”

The S&P 500 fell for a third straight day. Tech megacaps, which bore the brunt of the recent selling in equities, outperformed. Treasury 30-year yields hovered near 4.3%, extending a three-day surge to about 30 basis points. The dollar was little changed. The pound wavered as the Bank of England warned its fight against inflation may require tighter borrowing conditions for an extended period.

Jobs Report

A survey conducted by 22V Research shows that investors expect Friday's jobs figures to show strong employment and weak wage inflation.

Roughly 65% of respondents are betting payrolls will be greater than consensus. Meantime, 55% expect average hourly earnings to trail estimates — which helps explain why they also expect the equity-market reaction to be muted, the firm noted.

To Jason Draho at UBS Global Wealth Management, markets may actually be listless for the next month in the absence of any significant catalyst and after a strong run.

“Markets are already pricing in a soft landing, and increasingly with the belief that relatively little growth pain is required for inflation to gradually return to 2%,” Draho noted. “The markets are vulnerable to any signs that the economy, with the Fed's steering, is at risk of not sticking to that soft landing.”

Steeper Yield Curve

Meantime, rate options traders are paying through the nose for protection against further increases in long-maturity Treasury yields.

A metric that compares demand for bearish put options to demand for bullish call options shows the widest divergence since September for options on CME Group Inc.'s US Treasury Bond Futures contract, which currently tracks a bond that matures in 2039. The gaps are less extreme for options on shorter-maturity Treasury futures.

The steepening of the yield curve extended a trend since the Bank of Japan surprised markets last week with a policy tweak. At 4.88%, two-year yields are 71 basis points higher than those on the 10-year note. That's compared to a gap of 102 basis points two weeks ago.

“I remain wary of taking duration risks and still much prefer short duration bonds,” said Peter Boockvar, author of the Boock Report. “This sovereign bond bubble continues to unwind and the problem now is higher rates just exacerbates the sovereign debt rise as interest expense starts to explode higher, everywhere, not just in the US, highlighted by the Fitch downgrade.”

Elsewhere, oil rose after Saudi Arabia prolonged its unilateral production cut by another month and hinted that deeper reductions may be on the way.

After the Closing Bell:

Apple reported lower-than-anticipated quarterly sales of the iPhone, its flagship product, overshadowing record-setting services revenue at the world's most valuable company.
Amazon gave a sales outlook that topped estimates on a strong performance from its main e-commerce business.
Coinbase Global Inc., the largest US cryptocurrency exchange, said its second-quarter loss narrowed and revenue exceeded estimates.
Booking Holdings Inc. reported second-quarter revenue that beat analysts' estimates, reflecting strong demand for travel despite higher prices for flights and accommodations.
DraftKings Inc. posted second-quarter sales that beat expectations as the online sportsbook raised its forecast for the year.
Gilead Sciences Inc. lowered its earnings outlook for the year as a result of litigation costs accrued from settlements made to some plaintiffs in an antitrust lawsuit over its HIV drugs.
Amgen Inc. raised its profit and revenue guidance for the year as the drugmaker's overall second-quarter results exceeded Wall Street analysts' expectations despite the underperformance of two key products.