Dow slides 850 points, heads for biggest daily skid since October, as spread of delta variant and global tensions rattle investors

What’s driving the market?

Pressure on global equity markets Monday was attributed largely to the continued rise in the number of COVID-19 cases world-wide, but also to concerns about “peak everything” and to rising U.S. and China tensions.

“The delta variant is getting a lot of attention right now as an explanation for weakness,” said Sahak Manuelian, head of equity trading at Wedbush Securities in Los Angeles.

“Another good reason is really peak everything: peak valuations, peak growth,” he said. “Add in the delta variant and you have a decent case for why stocks are lower.”

“But the third thing, which might be the most troubling, is U.S.-China relations. They are certainly getting worse.”

The Biden administration on Monday blamed China for a hack of Microsoft Exchange email server software that compromised tens of thousands of computers around the world earlier this year. The European Union and Britain also pointed the finger at China.

Democratic senators also were expected to make public on Monday a plan to raise $14 billion annually by imposing taxes on China and other countries not significantly reducing emissions that warm the planet, the New York Times reported.

On the pandemic front, concerns about the virus have been particularly problematic for sectors and industries, such as travel, that were expected to benefit the most from the reopening of the global economy. The energy sector was the weakest of the S&P 500’s 11 key sectors Monday, down 4.4% at last check, while the Energy Select Sector SPDR ETF XLE, -3.56% was off 4.3%.

Crude CL00, -7.57% prices settled below $67 a barrel on Monday, their biggest daily percentage drop since March, following a weekend deal by the OPEC+ group to boost oil production. Major producers will add 400,000 barrels a day in production each month beginning in August until existing curbs totaling 5.8 million barrels a day are erased later next year.

Analysts, however, said the steep selloff in crude also reflected worries about the delta variant.

Airline stocks tumbled, with the industry-tracking U.S. Global Jets ETF JETS, -3.77% dropping 4.2%, while plane-maker Boeing Co. BA, -4.99%, a Dow component, tumbled 5.6%, on fears the spread of the variant could trigger renewed travel restrictions.

Also Monday, Treasurys continued to rally, keeping pressure on yields, which move in the opposite direction of prices. The yield on the 10-year Treasury note TMUBMUSD10Y, 1.198% was down about 11 basis points, dipping below 1.19% for the first time since mid-February.

“There are all these different feedback loops going back into each other,” said Victoria Fernandez, chief market strategist at Crossmark Global Investments, speaking to fears that COVID restrictions could potentially be partially reinstated, which could then erode consumer confidence and dampen spending, just as output is set to rise again.

“The most concerning is that if restrictions are put back in place, what does that mean for the consumer?” Fernandez told MarketWatch. “We keep expecting spending on consumer services to boost us in the second half.”

Read: Delta variant will be the ‘most serious virus’ the unvaccinated ever get, says Ex-FDA head Gottlieb

The American Academy of Pediatrics said that everyone 2-years-old and up should wear masks, regardless of their vaccination status, as COVID cases climb and to make schools safer for students. Google parent Alphabet Inc. GOOG, -2.05% also said it was “strongly encouraging” all returning employees to “wear a mask inside Google property at all times, regardless of vaccination status, until further notice.” 

Sam Stovall, chief investment strategist at CFRA, in a note, said that in the week ahead, investors will likely regard a further weakening of bond yields as a potential ‘canary in the coal mine.’”

The strategist said that bond yield declines could potentially overshadow earnings season, which has thus far been strong. About 85% of S&P 500 companies that have reported beating expectations and none providing guidance lower than expectations so far, according to John Butters, senior earnings analyst at FactSet.

Read: Why a bond rally could drive the 10-year Treasury yield lower still, even as inflation expectations become unmoored

Earnings season picks up steam this week, with nearly a third of the 30 Dow Jones Industrial Average components and more than 80 S&P 500 companies are expected to report quarterly results.

Earnings highlights for the week ahead include Netflix Inc. NFLX, +0.21% on Tuesday and Intel Corp. INTC, -0.65% on Thursday.

Earnings Preview: What does a mature streaming service look like? Netflix is about to show us

Meanwhile, the National Association of Home Builders said its monthly confidence index fell one point to a reading of 80 in July.

Which companies are in focus?

• Robinhood Markets Inc. HOOD, set terms for its initial public offering, in which the California-based retail trading platform could be valued at up to $35.1 billion.
• AutoNation Inc. AN, +3.66% on Monday second-quarter quarter profit and revenue that easily topped expectations, with particular strength in used car sales. Shares were up 2.6%.
• Shares of Five9 Inc. FIVN, +6.00% rose 6.3%, after the announcement of a $14.7 billion all-stock buyout deal by Zoom Video Communications Inc. ZM, over the weekend. Zoom shares slumped 2.3%.
• Bill Ackman’s Pershing Square Tontine Holdings PSTH, -1.26% said Monday that it was abandoning a deal to buy a 10% stake in Universal Music Group, citing regulatory and shareholder concerns. PSTH shares were down 1.4%.
• Cal-Maine Foods Inc. CALM, -3.87%  reported Monday a surprise fiscal fourth-quarter loss and revenue that fell below expectations, with egg sales dropping as the lifting of COVID-19-related restrictions led to less meals prepared at home. Shares were down 5.4%.

What are other markets doing?

• The ICE U.S. Dollar Index DXY, +0.18%, a measure of the currency against a basket of six major rivals, rose 0.2%.
• Gold futures GC00, -0.18% closed down 0.3% to settle at $1,809.20 an ounce.
• In European equities, the Stoxx Europe 600 SXXP, -2.30% closed down 2.3%, its largest one-day percent drop since December 2020, while London’s FTSE 100 UKX, -2.34% also slumped 2.3%.
• In Asia, the Shanghai Composite SHCOMP, -0.01% fell fractionally, while the Hang Seng Index HSI, -1.84% shed 1.8% and Japan’s Nikkei 225 NIK, -1.25% dropped 1.3%.