By Chris Matthews

A flattening yield curve also spooks investors

U.S. stocks fell Tuesday morning as investors reassessed the significance of an agreement reached by the U.S. and China to postpone new tariffs and as the market digested a flattening yield curve in U.S. government debt.

How are the benchmarks faring?

The Dow Jones Industrial Average fell 200 points, or 0.8%, to 25,618, while the S&P 500 index dropped 18 points, or 0.6%, to 2,772. The Nasdaq Composite fell 54 points, or 0.7%, to 7,387.

Read: December historically is the most wonderful time of the year for stocks (http://www.marketwatch.com/story/december-historically-is-the-most-wonderful-time-of-the-year-for-stocks-2018-12-03)

What's driving the market?

Skepticism surrounding the U.S. and China's ability to achieve a concrete deal to avoid new, or expanded, bilateral tariffs is rising, as investors focused on the lack of specific concessions made by China at last weekend's G-20 meeting in Argentina, where President Trump and Chinese leader Xi Jinping met.

While the U.S. agreed to 90-day moratorium on threats to raise tariffs on more than $200 billion in annual imports to 25% from 10%, a comparison of official statements (http://www.marketwatch.com/story/with-biggest-wildcard-off-the-table-a-santa-rally-could-stuff-investor-stockings-2018-12-03) from Chinese and U.S. officials suggests there may be a long way to go before the two camps are able to come to an agreement that can ease tensions more permanently.

Meanwhile, confusion spread Monday night over when exactly the 90-day timeline would begin, after White House economic adviser Larry Kudlow mistakenly stated that the negotiating window would begin on Jan. 1 of 2019. The White House later put out a correction (https://www.axios.com/white-house-corrects-kudlow-china-trade-truce-dec-1-09065467-e0f7-4737-b627-1c529de153b6.html), stating that it began on Dec. 1.

Also on the minds of equity investors is the flattening of the U.S. yield curve, as yields on government debt continued fall Tuesday. On Monday, the yield on five-year government debt fell below (https://www.bloomberg.com/news/articles/2018-12-03/the-flattening-yield-curve-just-produced-its-first-inversion?srnd=premium-europe) the yield on three-year debt, a phenomenon which has preceded previous recessions, and an indicator that investors are more confident about current than future economic growth as the Federal Reserve raises rates.

A more widely followed spread, that between the 2-year yield and the 10-year rate tightened to 13.3 basis points (http://www.marketwatch.com/story/10-year-yield-extends-fall-below-3-as-trade-in-government-debt-raises-concerns-2018-12-04), its narrowest in 11 years. This ratio is a popular gauge of future economic growth, and if the 10-year yield falls below the two-year, it will raise significant concerns of an impending recession.

What stocks are in focus?

Apple Inc. (AAPL) shares are falling 3.3% early Tuesday, after the stock was one of the leaders of Monday's rally, when it rose 3.5%.

Shares of Movado Group, Inc. (MOV) are rallying more than 13% at the start of trade Tuesday, after the watch designer reported third-quarter profit and revenue that beat expectations.

Dollar General Corp. (DG) stock is falling 6%, after the company cut its 2018 earnings outlook (http://www.marketwatch.com/story/dollar-generals-stock-falls-sales-beat-but-full-year-outlook-was-lowered-2018-12-04), though it beat estimates for third-quarter revenue in a Tuesday morning earnings release.

Shares of AutoZone Inc. (AZO) are in focus, after the company reported fiscal first-quarter earnings and same-store sales growth that beat Wall Street estimates. The stock is up 6.3% Tuesday morning.

LendingTree Inc. (TREE) shares are falling more than 3% Tuesday, after the firm issued a 2019 revenue outlook (http://www.marketwatch.com/story/lendingtree-provides-2019-revenue-outlook-thats-below-expectations-2018-12-04) below Wall Street expectations.

What are market participants saying?

"The boost to global risk appetite following the US-China trade "cease-fire" seems to have been short-lived. Even though US stock markets closed higher, they did surrender a decent part of their gains late in the session, and futures tracking the likes of the S&P 500 are pointing to a notably lower open today," wrote Marios Hadjikyriacos, investment analyst at U.k. brokerage XM.com.

"The major underlying story this morning is the yield curve as the 2's-10s spread compressed to new lows overnight (13bp) and the 2's-5's actually inverted," wrote Tom Essaye, president of the Sevens Report, in a Tuesday morning note to clients.

The movement in the bond markets "underscores growth concerns," for equity investors, he wrote.

What Fed speakers are in focus?

New York Fed president John Williams will deliver opening remarks before joining a panel of New York Fed economists to discuss trends in the U.S. labor market at 10 a.m. EST.

How are other markets trading?

Asian markets traded mostly lower on Tuesday (http://www.marketwatch.com/story/asian-markets-take-a-break-a-day-after-big-gains-2018-12-03), with Japan's Nikkei falling 2.4%, while markets in South Korea and Australia also finished down. China's Shanghai Composite Index rose a modest 0.4%.

In Europe, markets are also falling broadly, as the Stoxx Europe 600 has shed 0.5%, while the FTSE 100 is retreating (http://www.marketwatch.com/story/uk-stocks-fall-as-brexit-headlines-drive-up-sterling-2018-12-04) 0.3%.

Crude oil rallied Tuesday, rising 1.9% ahead of OPEC meeting this week (http://www.marketwatch.com/story/oil-rallies-in-lead-up-to-expected-saudi-russia-output-cut-2018-12-04) where production cuts are expected. Gold prices are up 0.4% Tuesday, while the is retreating (http://www.marketwatch.com/story/dollar-gets-whacked-as-3-year-and-5-year-government-bond-yields-invert-2018-12-04) 0.6%.

 

(END) Dow Jones Newswires

December 04, 2018 09:57 ET (14:57 GMT)

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