The stock market suffered significant losses on Wednesday after a strong reading of the August ISM services index raised concerns about the Federal Reserve’s tapering plans and interest rate hikes. The S&P 500 index fell below its 50-day moving average, a key technical support level, while the Nasdaq composite also tested that level intraday before closing slightly above it. The Dow Jones Industrial Average and the Russell 2000 index slid further below their 50-day lines. Apple, Nvidia and Tesla were among the big losers of the day.
ISM Services Index Surprises To The Upside
The ISM services index, which measures the activity of the U.S. service sector, rose to 54.5 in August from 52.7 in July, beating the consensus estimate of 52.4. The index showed that the service sector expanded for the 15th consecutive month, despite the challenges posed by the delta variant of Covid-19 and supply chain disruptions. The new orders, business activity and employment components of the index all increased from July, indicating strong demand and growth in the service sector.

However, the higher-than-expected ISM services index also sparked fears that the Fed may start tapering its bond-buying program sooner than expected and raise interest rates earlier than anticipated. The Fed has been closely monitoring the economic data to determine when to begin scaling back its stimulus measures, which have been supporting the stock market rally since the pandemic. The Fed has said that it will need to see “substantial further progress” in the labor market and inflation before making any changes to its policy.
The ISM services index report came a day after Fed Vice Chair Richard Clarida said that he could support announcing a tapering plan later this year and starting it early next year, if the economy continues to improve. Clarida also said that he expects the Fed to raise interest rates in 2023, sooner than his previous projection of 2024.
The market reaction to the ISM services index was swift and negative, as investors sold off stocks and bonds, pushing up Treasury yields and Fed rate hike odds. The yield on the 10-year Treasury note jumped to 1.37%, its highest level since mid-July, while the CME FedWatch tool showed that the market is pricing in a 54% chance of a rate hike by December 2022, up from 40% a day earlier.
Apple Falls On Legal Setback And iPhone Production Cut
Apple was one of the biggest drags on the market on Wednesday, as the tech giant faced a legal setback and a report of a cut in iPhone production. Apple shares fell 3.6% to 149.55, breaking below their 21-day exponential moving average and closing near their session lows.
Apple lost a major antitrust case against Epic Games, the maker of Fortnite, as a federal judge ruled that Apple must allow app developers to direct users to other payment methods outside of Apple’s App Store. The ruling could reduce Apple’s revenue from its App Store, which is estimated to be around $20 billion a year. Apple said it will appeal the decision.
Meanwhile, Nikkei Asia reported that Apple has slashed its planned production of iPhone 13 by as much as 10 million units due to chip shortages. The report said that Apple had initially planned to produce 90 million units of iPhone 13 by the end of this year, but now expects to produce only 80 million units or less. The report added that Apple is facing delays in receiving key components such as power management chips and display driver chips from its suppliers.
Apple is expected to unveil its new iPhone models on Sept. 14 at a virtual event.
Nvidia Drops On Downgrade And Crypto Crackdown
Nvidia was another big loser on Wednesday, as the chip leader was downgraded by BMO Capital Markets and faced a crackdown on cryptocurrency mining in China. Nvidia shares dropped 4% to 217.98, falling below their 21-day exponential moving average and closing near their session lows.
BMO Capital Markets analyst Ambrish Srivastava lowered his rating on Nvidia from outperform to market perform and cut his price target from 285 to 250, citing valuation concerns and regulatory risks. Srivastava said that Nvidia’s stock price already reflects its strong growth prospects and does not account for potential headwinds such as antitrust scrutiny over its proposed acquisition of Arm Holdings and competition from rivals such as Intel and AMD.
Nvidia also faced pressure from China’s crackdown on cryptocurrency mining, which has been a key driver of its revenue growth in recent quarters. China’s central bank issued a statement on Wednesday saying that it has shut down a company that was providing software services for cryptocurrency transactions and warned other platforms to stop offering such services. China has been tightening its grip on cryptocurrency activities since May, when it banned financial institutions and payment companies from providing services related to cryptocurrency transactions.
Nvidia has been benefiting from the surge in demand for its graphics cards from cryptocurrency miners, who use them to generate digital coins. In its latest quarter, Nvidia reported that its revenue from cryptocurrency mining products was $266 million, up from $150 million in the prior quarter.
Tesla Lags On Model 3 Recall And China Sales
Tesla was another notable laggard on Wednesday, as the electric vehicle maker announced a recall of some Model 3 vehicles and reported a decline in its China sales. Tesla shares fell 1.9% to 753.87, closing below their 21-day exponential moving average and near their session lows.
Tesla said it is recalling 5,974 Model 3 vehicles in the U.S. due to a potential defect in the brake caliper bolts, which could cause a loss of tire pressure and increase the risk of a crash. The recall affects Model 3 vehicles made between 2019 and 2021. Tesla said it is not aware of any accidents or injuries related to the issue and will inspect and tighten or replace the bolts as needed.
Tesla also reported that its China sales fell 14% in August from July, according to data from the China Passenger Car Association. Tesla sold 12,885 vehicles in China last month, down from 14,954 vehicles in July. The decline was partly due to seasonal factors and chip shortages, but also reflected the intense competition and regulatory scrutiny that Tesla faces in the world’s largest EV market.
Tesla has been facing challenges in China since earlier this year, when it faced consumer complaints over quality issues, protests at auto shows, and investigations by regulators over safety and data security concerns. Tesla has been trying to improve its image and customer service in China, but it still faces fierce competition from local rivals such as Nio, Xpeng and Li Auto.