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AS YIELDS BAKE, U.S. STOCKS FEEL THE HEAT (1601 EDT/2001 GMT)

U.S. stocks ended down on Wednesday as Treasury yields rose again and investors assessed the latest batch of quarterly results from companies.

Additionally, growing tensions in the Middle East dented risk sentiment, with gold XAU= and crude futures CLc1 among the day's gainers.

The U.S. 10-Year Treasury yield US10YT=RR extended its rise, reaching 4.9280%, its highest level since July 2007.

With this, the S&P 500 index .SPX slid more than 1%, and hit a low of 4,303.84. However, it ended at 4,314.60 which means the 61.8% Fibonacci retracement of its 2022 decline at 4,311.69 held on a closing basis.

In any event, most S&P 500 .SPX sectors ended red with real estate .SPLRCR, consumer discretionary .SPLRCD, industrials .SPLRCI, and materials .SPLRCM all losing more than 2% each.

Just energy .SPNY, buoyed by rising oil prices, and defensive staples .SPLRCS rose, the latter buoyed by a 2.6% rise in Procter & Gamble after its quarterly results.

FANGs .NYFANG fell, but for the first time this week, such groups as transports .DJT and regional banks .KRX took hits as well. The DJT suffered its biggest fall since April 26, while the KRX dropped its most since August 15.

Despite the rise in gold, precious metals miners declined on the day. The AMEX gold bugs index .HUI lost 0.3%.

On Thursday, investors will be reacting to reports from Tesla TSLA.O and Netflix NFLX.O, due after the close on Wednesday, as well as a report from Taiwan Semiconductor TSM.N among others.

Investors will also be reacting to jobless claims, Philly Fed, existing home sales, and the leading economic index.

Here is where markets stood just shortly after 1600 EDT:

(Terence Gabriel)

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NETFLIX FEELS THE "SUITS" EFFECT IN Q3 (1345 EDT/1745 GMT)

As Netflix NFLX.O is set to report its third-quarter results after the bell on Wednesday, one show - "Suits" - kept viewers glued to it, helping it widen its lead over streaming competitors, data from research firm Parrot Analytics showed.

A dual work stoppage by Hollywood writers and actors, coupled with a slowdown in streaming content spend has impacted all U.S. media and entertainment companies.

While Netflix has weathered the strikes better than its peers thanks to its larger international presence, overall global supply of new streaming original series has shrunk during all three quarters of 2023, with Q3 experiencing the sharpest drop off so far, the research firm said.

Still, the Meghan Markle-starred legal drama "Suits" was one of the most in-demand titles on the platform throughout Q3. Netflix licensed it from USA Network at the end of the second quarter.

"With a whopping nine seasons and 134 total episodes, Suits represents the type of long-tail retention and engagement that Netflix — and its advertisers — love to see," Parrot Analytics said.

Netflix's share of total streaming market for movies and series grew to 17.3%, a 1.9% lead over Warner Bros Discovery's WBD.O Max, data showed.

Netflix's crackdown on password-sharing likely boosted subscribers by about 6 million in the third quarter and the streaming pioneer is expected to set the stage for price increases when it reports earnings.

After a slow start for the ad plan launched last year, analysts said they expect Netflix will raise prices of its ad-free options in the coming months to nudge more subscribers to the other tier, where commercials help bring in more revenue per user.

(Juby Babu and Chavi Mehta)

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NO TINA, THERE WILL BE ALTERNATIVES (1312 EDT/1712 GMT)

With interest rates soaring, equity trading has been hugely sensitive to moves in bond yields. And even with hopes high for soft landings and Fed rate cuts in 2024, Anthony Saglimbene, chief market strategist at Ameriprise Financial is expecting similar trends next year.

"The rate environment, the inflation environment and the risk of a slower growth is likely to be with us for much of 2024, which doesn't really paint a great picture for the stock market," Saglimbene told Reuters on Tuesday.

Sure, his colleague Russell Price, Ameriprise's chief economist, expects the Fed may cut rates twice next year by 25 basis points each time, starting in the third quarter. But Saglimbene still sounds unimpressed.

"Other times when the Fed was cutting interest rates they were generally cutting interest rates when the economy was falling off pretty dramatically. That's not our estimate," the strategist said adding that "there is likely to be a higher level of interest rates for much of if not all of 2024."

And with rates high that means "more competition for stocks, from bonds and cash like investments, which limits the amount of risk that investors need to take." As opposed to the prior low rate environment, which favored equities and was often referred to by the term TINA, or "There Is No Alternative" by many market participants.

So he says, it will look a lot like now. "There's more competition for investors dollars. You can be more conservative. You can get yields on fixed income and that's not a great setup for stocks to explode higher," Saglimbene says.

Meanwhile, although Ameriprise's Price is eyeing a soft landing for the economy, he is watching the price of oil carefully as it has the potential to push GDP lower.

"If we do see a further expansion of problems in Middle East and it pushes up crude oil prices much further, that could be enough to push us into negative (whether they call it a recession in hindsight or not) territory for a period of time," said the economist.

(Sinéad Carew, Gertrude Chavez-Dreyfuss)

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THE BALANCE MAY HAVE TIPPED IN FAVOR OF TIPS (1235 EDT/1635 GMT)

The move higher in Treasury yields has been unrelenting, with intermediate and longer term Treasury yields bearing the brunt of the move.

According to Lawrence Gillum, chief fixed income analyst at LPL Financial Research, rates are moving higher alongside a U.S. economy that has continued to outperform expectations and not because of higher inflation fears.

"As such, the move higher has been largely driven by an increase in 'real' yields, or inflation-adjusted yields or just TIPS (Treasury Inflation-Protected Securities)," writes Gillum in a note.

Gillum recounts that, after spending years in negative territory, TIPS yields are decidedly positive again for 5-year, 10-year, and 30-year maturities and, therefore, he says value has been restored in the TIPS market. Moreover, since 2007, he says TIPS yields have rarely been higher:

Looking at trailing returns, however, Gillum says that investors may be surprised to see the negative returns generated by a TIPS index, "despite generationally high inflationary pressures."

This leads him to conclude that the challenge for TIPS, has not been the inflationary environment, but rather the aggressive rate hiking campaign by the Fed to quell those high inflation pressures.

Gillum notes that while TIPS provide a hedge against inflation, they do not provide a hedge against higher interest rates. So, if the Fed is indeed close to the end of its rate hiking campaign, he believes the volatility experienced in TIPS over the last few years may be coming to an end as well.

Gillum's bottom line is "with yields at levels last seen in over a decade, TIPS could provide an attractive real return for particularly those investors who can buy and hold individual bonds to maturity."

(Terence Gabriel)

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TIME FOR ETFS TO SHINE (1219 EDT/1619 GMT)

Exchange traded funds (ETFs) are seen as a large opportunity in 2023 by 74% of asset managers that offer them, leading other investment vehicles, according to a survey by Cerulli Associates.

In comparison, only 50% of asset managers that offer open-end mutual funds view them as a large opportunity.

Among those that don't already offer ETFs, 20% plan to build them over the next 12 months, the poll added, while 50% currently are considering them, but have no formal plans.

Rather than expanding their product line up, more than half of the asset managers plan to replicate existing strategies in new wrappers, in some cases tweaking them to take advantage of vehicle attributes, according to Cerulli.

"As investors have further embraced ETFs, asset managers built out their lineups in 2023," said Todd Rosenbluth, head of research at VettaFi.

"We have many newer entrants expanding their lineups and well-established providers offering more targeted approaches."

Morgan Stanley is among the latest managers to join the conversion rush, recently announcing plans to transform its Core Plus Fixed Income Portfolio fund and the Short Duration Municipal Income Portfolio fund, which have nearly $750 million in assets, into ETFs.

(Bansari Mayur Kamdar)

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S&P GLOBAL ASSESSES SUPPLY CHAINS OUT OF ISRAEL (1201 EDT/1601 GMT)

As S&P Global Market Intelligence sees it, the impact on supply chains coming out of Israel as a result of the current conflict will depend on the escalation pathway.

Analysts at S&P Global are saying that logistics infrastructure at the port of Ashdod is the closest container port to Gaza, and that at least one shipping line has indicated that maritime traffic is operating normally as of Oct. 9. However, S&P adds that air freight out of Tel Aviv airport may be disrupted.

Israel’s largest export lines include electronics, healthcare and defense, which could face operational or logistics disruptions in the event the conflict intensifies.

According to the S&P Global analysts, Israeli suppliers accounted for 14% of EU computer processor imports in the 12 months to July 31, 2023, shipped predominantly to Ireland by fabricating facilities owned by Intel INTC.O and Tower Semiconductor TSEM.O.

They add that Israel also exported $2.62 billion-worth of telecom network equipment and $3.15 billion-worth of aerospace equipment, including unmanned aerial vehicles (UAVs), in 2022 — both led by shipments to Europe and the U.S.

Exports of pharmaceuticals, worth $2.17 billion, are seen as particularly susceptible to logistics network disruptions.

However, S&P Global says that Israel’s importance to global drug supply chains has fallen to 1.1% of U.S. imports and 0.8% of EU imports as a result in part of reshoring by Israeli pharmaceutical manufacturers.

(Terence Gabriel)

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A HOUSE DIVIDED: HOUSING STARTS JUMP, MORTGAGE DEMAND HITS LOWEST SINCE 1995 (1134 EDT/1534 GMT)

Two seemingly contradictory bits of housing market data hit the wire on Wednesday - housing starts rebounded, but mortgage applications tanked.

What gives?

Groundbreaking on new U.S. homes USHST=ECI rebounded by 7.0% last month to 1.358 million units at a seasonally adjusted annualized rate (SAAR), landing 1.6% shy of consensus.

Beneath the headline, starts in the multiple-unit segment jumped 17.6% while single-unit starts, which account for the lion's share of the total, rose 3.2%.

The Commerce Department's report also included building permits data USBPE=ECI. Considered among the more forward-looking housing market indicators, permits dropped 4.4% to 1.473 million units SAAR, or 1.6% more than expected.

Multiple-family permits tumbled 14.3% while single-family permits increased by 1.8%.

So considering skyrocketing mortgage rates and a dearth of existing homes on the market, how does this jibe with the surprisingly dour homebuilder sentiment reading from Tuesday?

"Underneath the surface, there is trouble brewing in housing," writes Jamie Cox, managing partner at Harris Financial Group. "The accumulating effect of higher mortgage rates (and interest rate costs for builders themselves) are denting sentiment."

"The last thing we need with a structural shortage of housing is lower sentiment leading to lower building," Cox adds.

Speaking of higher borrowing costs, demand for home loans slid last week, with applications plunging to their lowest level since 1995 as mortgage rates continued to press past multi-decade highs, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate USMG=ECI inched up 3 basis points to 7.70%, the highest level since late 2020. As a result, applications for loans to purchase homes USMGPI=ECI and refinance existing mortgages USMGR=ECI tumbled by 5.6% and 9.9%, respectively.

"Homebuying activity continues to pull back given reduced purchasing power from higher rates and the ongoing lack of available inventory," says Joel Kan, MBA's deputy chief economist.

As shown in the graphic below, overall mortgage demand is down 18.4% from the same week a year ago:

(Stephen Culp)

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U.S. STOCKS WEAKER IN EARLY TRADE (1015 EDT/1415 GMT)

Major U.S. averages are lower in the early stages of trading on Wednesday, with the Dow Industrials .DJI on track to snap a three-session win streak, while the S&P 500 .SPX and Nasdaq Composite .IXIC are both on track for a second-straight daily decline.

Investors continue to eye the Middle East for any signs of increasing tensions, as U.S. President Joe Biden arrived in Israel on Wednesday pledging solidarity in its war against Hamas, while the pace of the U.S. corporate earnings season picks up.

Most S&P 500 sectors are lower early Wednesday with materials .SPLRCM and industrials .SPLRCI taking the biggest hits. Energy .SPNY is higher as oil prices climbed on the risk of conflict escalating in the Middle East which sent Brent LCOc1 as high as $93 per barrel.

Consumer staples .SPLRCS is the only other S&P 500 sector in the green, buoyed by gains in Procter & Gamble PG.N after the maker of products such as Gillette razors and Oral-B toothbrushes said it would achieve the higher end of its annual sales and profit forecasts as consumers.

Weakness in United Airlines UAL.O is hitting industrials. The stock is diving roughly 8% after it reported quarterly results late Tuesday, and forecast weaker fourth-quarter earnings due to higher costs.

Below is an early trade snapshot:

(Chuck Mikolajczak)

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S&P 500 INDEX: FULL DANCE CARD WITH CLOSELY FOLLOWED MOVING AVERAGES (0900 EDT/1300 GMT)

Over the past month or so, the S&P 500 index has been dancing between key technical levels which include a number of closely followed moving averages:

Indeed, the SPX, which ended Tuesday at 4,373.20, is trapped within a range which includes its 50-, 100- and 200-day moving averages (DMA).

The descending 50-DMA and rising 100-DMA are resistance, and should resides around 4,396 and 4,410 on Wednesday. The SPX hit a high of 4,393.57 on Tuesday before backing away.

Meanwhile, the rising 200-DMA should be around 4,228 on Wednesday. The SPX's weakness into early October was contained by this longer-term moving average.

On Wednesday, e-mini S&P 500 futures EScv1 are suggesting the S&P 500 index is poised to drop around 20 points, or 0.5%, at the open.

In any event, traders are also eyeing additional key levels.

The 61.8% Fibonacci retracement of the 2022 decline is at 4,311.69. It contained last week's weakness.

The 4,200 area remains significant. The early October lows were at 4,216.45 and 4,219.55, and there is a rising weekly Gann Line which is around 4,215 this week.

The 23.6% Fibonacci retracement of the March 2020-January 2022 advance is at 4,198.70, and the early February 2023 high was at 4,195.44.

Closes back over the 100-DMA would be a constructive turn, and ultimately, with enough strength and time, could turn the trend in the descending 50-DMA back to the upside.

(Terence Gabriel)

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)