By Mark DeCambre, MarketWatch
The bond market is closed for Columbus Day
U.S. stocks traded lower Monday -- but quickly came off their
worst levels -- as investors wrestled with fears about rapidly
rising rates against expectations for strong corporate results in
coming days.
On top of that, investors were keeping an eye on the potential
for tensions between Italy and the European Union over budgetary
concerns.
The bond market was closed in observance of Columbus Day
(http://www.marketwatch.com/story/why-monday-may-offer-a-respite-for-stock-market-investors-after-a-bruising-bond-rout-2018-10-05)
and Indigenous Peoples Day.
How are major benchmarks faring?
The Dow Jones Industrial Average traded 64 points, or 0.3%,
lower at 26,379, while the S&P 500 index declined by about 7
points to reach 2,878, a fall of 0.3%, but the index had been
swinging on either side of break even. The Nasdaq Composite Index
retreated by 50 points, or 0.7%, at 7,737.
Consumer staples, led by Conagra Brands Inc. (CAG) and Dow
component Walgreens Boots Alliance Inc. (WBA) helped to limit early
declines. One measure of consumer staples, the Consumer Staples
Select Sector SPDR ETF (XLP), was trading higher.
All three stock benchmarks are on track to post a third straight
decline.
The Dow slumped 180.43 points
(http://www.marketwatch.com/story/us-stocks-look-poised-to-resume-yield-driven-stumble-2018-10-08),
or 0.7%, to 26,447.05 Friday. The S&P 500 fell 16.04 points, or
0.6%, to 2,885.57. The Nasdaq dropped 91.06 points, or 1.2%, to
7,788.45.
Monday's action comes after the Nasdaq logged its worst weekly
decline since March 23 and the S&P 500 logged its second
straight weekly decline amid a surge in long-dated Treasury rates
to their highest since 2011. Bond prices fall as yields rise.
Read: 3 reasons why U.S. government bond yields are soaring
(http://www.marketwatch.com/story/3-reasons-why-us-government-bond-yields-are-soaring-2018-10-03)
What's driving the market?
A jump in government bond yields over the past several sessions
has perhaps heralded a new phase in postcrisis markets that have
enjoyed a protracted period of ultra low yields.
Last week saw the yield on the 10-year U.S. Treasury note rise
17.1 basis points, representing its sharpest weekly advance since
February and taking it toward 3.23%, its highest level in about
seven years.
Higher yields equates to steeper borrowing costs for
corporations and investors alike and has caused a reassessment of
equity valuations, already deemed lofty by some measures.
On top of that, richer rates of so-called risk-free bonds can
compete against equities, which are perceived as comparatively
riskier.
Climbing rates, however, have come against a solid backdrop for
the domestic economy, with the unemployment rate falling to its
lowest level since 1969
(http://www.marketwatch.com/story/jobs-report-still-consistent-with-strong-economy-even-as-employment-gains-slow-economists-say-2018-10-05)
and a number of other gauges in previous weeks have underlined the
notion that the U.S. expansion continues apace.
Read:Sure, yields are rising--but it's the bond market's
velocity that threatens to throttle stocks
(http://www.marketwatch.com/story/sure-yields-are-risingbut-its-the-bond-markets-velocity-that-threatens-to-throttle-stocks-2018-10-07)
As for quarterly results, companies in the S&P 500 are
projected to post 10% earnings growth in 2019, according to
FactSet, offering more evidence of economic health.
Abroad, investors were also watching developments in Europe,
with the EU signaling in a letter Friday to Italy's economic
minister, Giovanni Tria, that Italy's budget targets are a source
of concern for the trading bloc
(http://www.marketwatch.com/story/european-commission-expresses-serious-concern-over-italy-budget-report-2018-10-06),
setting up a potential market-disrupting clash.
Additionally, Wall Street remains fixated on progress in trade
talks between the U.S. and its major partners, including China,
which had previously been the main source of volatility for global
markets. A tit-for-tat tariff battle between Beijing and Washington
remains intact.
What are analysts saying?
"The yield on the 10-year hit a fresh seven year high on Friday,
and dealers are using that as a cue to exit the stock market for
fear of higher rates. The Fed have upped interest rates three times
in 2018, and traders are pricing in a high probability of a hike in
December too," wrote David Madden, market analyst at CMC Markets
UK.
"The market got off to a strong start in the final quarter of
the year, only to stumble on rising bond yields. The yield effect
and the upcoming earnings season, we think, will likely curtail
investors' appetite for stocks as the game in town is challenged by
higher rates," wrote Peter Cardillo, chief market economist at
financial services firm Spartan Capital Securities, in a Monday
report.
"While we think the overall earnings season will be favorable,
the weight of tariffs will be felt in some situations, which could
lead to a less enthusiastic market atmosphere. We continue to
remain optimistically cautious in the near term," he said.
Which stocks are in focus?
Shares of Tesla Inc. (TSLA) fell 3.1%, despite the electric-car
maker Sunday night saying that it has achieved its goal of making
the Model 3 sedan the safest car ever built
(http://www.marketwatch.com/story/tesla-says-its-model-3-has-lowest-probability-of-injury-of-any-car-tested-by-nhtsa-2018-10-07).
ENSCO PLC's stock (ESV) was up 1.8% after Rowan Cos. PLC(RDC)
announced a merger
(http://www.marketwatch.com/story/ensco-and-rowan-cos-to-combine-in-deal-with-enterprise-value-of-12-billion-2018-10-08)
valued at $12 billion. Shares of Rowan were up 1.9%.
What other markets are in focus?
China's major indexes in Shanghai and Shenzhen closed down by
more than 3.5%, as traders returned to work after a weeklong
holiday, and as China's central bank loosened reserve requirements
(http://www.marketwatch.com/story/asian-markets-lag-as-chinese-stocks-fall-after-weeklong-layoff-2018-10-07).
Meanwhile, crude-oil prices were trading firmly lower, while
gold was under pressure and the U.S. dollar index gained 0.4%,
proving to be headwinds for assets priced in the currency.
(END) Dow Jones Newswires
October 08, 2018 11:19 ET (15:19 GMT)
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