GO
Loading...

Spiking interest rates rattle the market's cage

Getty Images

Anxiety over when the Federal Reserve will begin tapering its bond purchases and the subsequent spike in interest rates could keep markets choppy Tuesday.

"At some point, [the Fed] has to start to taper and that's what the market is preparing itself for…whether it's in September or October," said Kenny Polcari, director at O'Neil Securities.

(Read more: Traders beware: 6 weeks of intense volatility ahead)

Benchmark 10-year note yields climbed as high as 2.90 percent Monday, the highest level since July 2011 and up from nearly 2.60 percent a week ago. Yields have gained more than a full percentage point since early May when Fed Chairman Ben Bernanke first hinted the central bank may scale back its asset purchases.

"This market's been toggling and waiting for direction—it's a scenario in which it's not just economic data or geopolitical data, but still central bank driven," said Quincy Krosby, market strategist at Prudential Financial. "We've always said the road toward interest rate normalization is going to be difficult and dotted by detours and obstacles."

(Read more: Pros explain how to play housing with rising rates)

Art Cashin, director of floor operations at UBS Financial Services warned earlier Monday that "alarm bells" will go off for stocks once the yield hit the 2.90 percent level, adding that rising interest rates are already causing problems for equities in emerging markets.

"India is beginning to look particularly strange ... Indonesia is getting pounded," Cashin told CNBC. "You don't usually have these at the top of your list, but they lurk in the background."

U.S. stocks finished near session lows in light-volume trading Monday, with the Dow and S&P 500 logging their first four-day losing streaks this year. The Dow finished near the psychologically-important 15,000 level, extending losses after suffering its worst weekly decline of 2013.

"The big picture is really digestion. After last week's move, we broke through some key technical levels…but we're certainly not breaking down," reassured Polcari.

Still, the Dow and S&P 500 have declined nearly 4 percent each since hitting their all-time highs at the beginning of the month.

"In terms of seasonality—absent the Fed, economic data and geopolitical news—the next five to six weeks are typically not a strong period for the equity market so you'd expect to see a pullback," noted Krosby. "Also, we haven't seen a true correction in some time and I think investors want to see the market behave in its typical way without central bank intervention."

The Fed is expected to release the minutes from its latest policy meeting on Wednesday and global central bankers are scheduled to meet in Jackson Hole, Wyo. later this week. While Chairman Ben Bernanke will not make an appearance at the annual event, Vice Chairwoman Janet Yellen, one of the two likely front-runners for the Fed chief position next year, will attend. Larry Summers, the other widely-considered candidate, will not attend.

"We'll be watching the Fed minutes and there may be some nuggets that could add color to the debate at the Fed," said Krosby.

The retail earnings parade will continue Tuesday with companies including Home Depot, Best Buy, TJX and JCPenney slated to report in the morning. Upscale department-store chain Saks became the latest retailer on Monday to disappoint Wall Street analysts with weaker-than-expected earnings and tepid sales.

(Read more: Retail: It's (almost) all bad news)

To date, 92 percent of S&P 500 companies have posted second-quarter earnings, with 67 percent of firms topping earnings expectations and 53 percent beating revenue estimates, according to the latest data from Thomson Reuters.

The Chicago Fed National Activity Index will be released at 8:30 am ET. There are no other major economic reports on tap Tuesday.

(Read more: Three top areas for investing now: Strategist)

—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.