By Chuck Mikolajczak
NEW YORK (Reuters) -Global stocks dropped for a third straight session on Monday as the recent bout of elevated U.S. Treasury yields prompted profit-taking at the end of a strong year for equities.
On Wall Street, all three major U.S. indexes closed with sharp losses in a broad selloff, with each of the 11 major S&P 500 sectors closing in negative territory led by declines in consumer discretionary stocks.
The benchmark 10-year U.S. Treasury yield's recent push above the 4.5% mark after the Federal Reserve on Dec. 18 signaled it would take a slower interest rate cut path has fueled concerns about elevated stock market valuations.
"The bond market has somewhat taken its cue from what's happening in the equities market," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.
"Investors did some profit-taking in equities and maybe re-deployed to fixed income. At this point, the bond market is compelling given the recent rise in bond yields over the past weeks."
The Dow Jones Industrial Average fell 418.48 points, or 0.97%, to 42,573.73, the S&P 500 fell 63.90 points, or 1.07%, to 5,906.94 and the Nasdaq Composite fell 235.25 points, or 1.19%, to 19,486.79.
The 1% drop for the S&P 500 marked the first time the index has had two daily declines in the last five trading days of the year since at least 1952, according to Bespoke Investment Group.
In a Sunday note, Julian Emanuel, senior managing director leading equity, derivatives and quantitative strategy at Evercore ISI in New York, said rising bond yields are the biggest challenge to the current cyclical bull market, with key levels for the 10-year yield at 4.5%, 4.75% and 5%.
U.S. stocks have rallied this year with the S&P 500 up about 24%, buoyed by growth expectations surrounding artificial intelligence, expected rate cuts from the Fed, and more recently, the likelihood of deregulation policies from the incoming Trump administration.
But the recent economic forecast from the Fed, along with worries that President-elect Donald Trump's policies such as tariffs may prove to be inflationary, have sent yields higher, with the 10-year reaching its highest level since May 2 at 4.641% last week.
U.S. yields were lower on Monday, however, and briefly extended declines after data showed business activity in the U.S. Midwest contracted more than expected in December.
Other data showed U.S. pending home sales rose more than expected in November, in a fourth straight month of gains, as buyers took advantage of better inventory despite elevated mortgage rates.
MSCI's gauge of stocks across the globe lost 7.33 points, or 0.86%, to 844.29, but was still up more than 16% on the year.
Trading volumes were muted ahead of the New Year holiday on Wednesday. Stock markets in Germany, Italy and Switzerland will be closed on Tuesday, while those in the UK and France have a half-day trading session.
European stocks were also weaker due to elevated yields, with the 10-year German bund yield holding near six-week highs. The pan-European STOXX 600 index closed down 0.46%, its first decline after three straight sessions of gains.
Bond investors may also be wary of increasing supply as Trump has promised tax cuts with little in the way of details for restraining government spending.
The yield on benchmark U.S. 10-year notes fell 7.6 basis points to 4.543%.
Widening interest rate differentials have boosted the appeal of the U.S. dollar. The dollar index, which measures the greenback against other major currencies, is up 6.5% on the year. On Monday, the index edged up 0.07% to 108.06, with the euro down 0.25% at $1.0401. The single currency is down nearly 6% on the year versus the greenback.
Against the yen, the dollar weakened 0.64% to 156.81 but was still holding at levels which recently prompted an intervention in the currency by Japanese officials.
U.S. crude settled up 0.55% to $70.99 a barrel, and Brent settled at $74.39 per barrel, up 0.3% on the day.
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