Dow down 180 points, set for 3rd straight drop as yield-fueled drop gains steam

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Dow down 180 points, set for 3rd straight drop as yield-fueled drop gains steam

U.S. stocks traded lower Monday in a choppy session 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 and Indigenous Peoples’ Day.

How are major benchmarks faring?

The Dow Jones Industrial Average DJIA, -0.15% traded 183 points, or 0.7%, lower at 26,260, while the S&P 500 index SPX, -0.30% declined by about 19 points to reach 2,866, a fall of 0.7%. The Nasdaq Composite IndexCOMP, -1.07% retreated by 103 points, or 1.4%, at 7,683.

All three benchmarks had been swinging between gains and losses.

Defensive stocks were drawing bids, with consumer staples, led by Conagra Brands IncCAG, +3.32%  and Dow component Walgreens Boots Alliance Inc.WBA, +2.62% higher. One measure of consumer staples, the Consumer Staples Select Sector SPDR ETF XLP, +1.40% was gaining as were S&P 500’s real estate and utilities sectors, up more than 1% each.

The Dow slumped 0.7% to 26,447.05 Friday. The S&P 500 fell 0.6% to 2,885.57 and the Nasdaq dropped 1.2% to 7,788.45.

A decline for Dow, S&P 500 and Nasdaq would represent its third straight drop.

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

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 noteTMUBMUSD10Y, +1.37%  rise 17 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 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

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, setting up a potential market-disrupting clash.

Additionally, Wall Street is following the 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,” said 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 IncTSLA, -4.45%  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.

ReadEinhorn sees shades of Lehman in Tesla, says Musk knows deception is catching up to him

ENSCO PLC’s stock ESV, +2.36% was up 1.8% after Rowan Cos. PLCRDC, +2.37%  announced a merger valued at $12 billion. Shares of Rowan were up 1.9%.

What other markets are in focus?

China’s major indexes in Shanghai SHCOMP, -3.72%  and Shenzhen399106, -3.83%  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.

Crude-oil CLK9, -0.28% prices were trading firmly lower, while goldGCM9, -1.40% was under pressure and the U.S. dollar index DXY, +0.16% gained 0.4%, proving to be headwinds for assets priced in the currency.