| Good morning. US equities get a fresh dose of reality. The yield curve turns steeper. India may amend rules for the issuance of new bonds. Here's what's moving markets. — Isabelle Lee Wall Street got a reality check after a disappointing start of the megacap earnings season fueled concern the artificial-intelligence frenzy that has powered the bull market might be overblown. High-flying tech stocks drove the S&P 500 to its worst day since December 2022, ending its best stretch without a 2% decline since the start of the global financial crisis. Losses were more pronounced in the Nasdaq 100, which tumbled 3.65%. Alphabet slid 5% after sinking more resources into its drive to outmatch rivals in AI, with spending higher than analysts expected. Tesla's profit miss and the Robotaxi delay spurred a 12.3% stock plunge. The session was another lesson in the "concentration risk" in a market whose upside has owed disproportionately to a narrow cohort of massive gainers. For a fourth straight session — and the 10th time in 11 days — the performance of smaller firms outperformed larger ones. The US yield curve is turning steeper amid growing calls for the Federal Reserve to start cutting interest rates as soon as next week. Yields on policy-sensitive two-year Treasuries slid three basis points while those on 10-year bonds were up by about the same amount. That puts the differential at about 14 basis points, the smallest margin since October 2023. That's an indication investors see the Fed potentially reducing rates faster and deeper than previously anticipated. Swaps traders still price in more than two quarter-point cuts this year, with the first move likely in September. But with the central bank set to announce its next decision in a week, pressure is rising for lower rates. India may amend rules for the issuance of new bonds that are eligible to trade on global indexes if large inflows spur volatility, according to a top Finance Ministry official. The government has an option to tweak the fully accessible route for securities that will be issued in the future, the source told Bloomberg. It may impose a limit on foreign inflows in the so-called FAR bonds if there's an excessive surge in flows. The central bank has designated a class of bonds that can have full foreign ownership. JPMorgan has included securities from this set of bonds in its emerging markets index that India joined last month. China's lackluster economy is helping to make oil from the US and Europe increasingly uncompetitive in Asia, where refiners are set to favor supply that's closer to home. A closely watched oil market gauge measuring the premium of Europe's Brent crude over Dubai — known as Brent-Dubai EFS — rose to its widest since early March in recent days. A related swaps contract that normally moves a handful of cents a day has gained almost a dollar in the past two weeks. The sizable swings have been the talk of the oil market. Traders said the widening will make Middle Eastern crude more attractive to Asian refiners, and longer-haul flows less appealing. South Korea's GDP is due on Thursday, which is expected to show growth slowed sharply in the second quarter due to an unwinding of temporary factors that boosted the pace in the first quarter. Elsewhere, the US will also report GDP data, as well as initial jobless claims and durable goods. Here's what caught our eye over the past 24 hours: - Trump's VP pick may signal he won't make M&A great again
- Wall Street donors plan get-rich-quick ideas for Harris bid
- CrowdStrike sends $10 gift cards to workers as mea culpa
- Netanyahu tells Congress US, Israel must 'stand together'
- Typhoon Gaemi aims at China after pounding Taiwan, Philippines
- Real estate market is broken for everyone but ultra rich
In the US, the earnings are pouring in. The disappointment is palpable from Tesla to Ford and beyond. The Nasdaq was down a whopping 3.65% on Wednesday alone. There's nothing to suggest this is anything more than a correction of a market that was getting ahead of itself. The Atlanta Fed's GDPNow estimate for the second quarter is still running at 2.6% based on its latest update on Wednesday, for example. And initial jobless claims are down, averaging 2,500 less in the last four weeks than they did at this time a year ago. But, even if this is just a mini-correction, the rotation across sectors could be meaningful. Deutsche Bank's Jim Reid crunched the numbers. And he says: "I did what I thought was a very good CoTD on Friday reminding readers of what happened to other sectors when the tech bubble burst in March 2000. The three "dullest" sectors (Consumer Staples, Healthcare and Utilities) had performed badly in the last few months of the bubble but rallied +25-35% in the final 9 months of the year as tech slumped. It wasn't until 2001 and 2002 that the wider market really slumped. So if tech does see a correction, the market will likely go down given their size, but several sectors could rally notably." The upshot of that analysis is that a correction, within the context of a longer bull market, is quite a different outcome than one that presages worse to come as the economy stalls. Small caps and 'dull' sectors like consumer staples, healthcare and utilities can continue to rally in the context of a continued bull market. A recession, though, hits everything. In any event, note that the 2-year bond rallied hard as the Nasdaq meltdown took place. But long-term bonds sold off, with the curve steepening 12 basis points in a single day from 2 to 30 years. And so, despite the cascade of earnings reports, I have my eye more on the bond market. That steepener trade is still the move to watch for now, something I give voice to in the latest Everything Risk column. Ed Harrison writes the Everything Risk newsletter. Follow him on X at @edwardnh. | 
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