LIVE MARKETS-NAHB: Homebuilders still smiling, but not as broadly

* All 3 major U.S. stock indexes sharply lower; Dow fares worst

* All S&P 500 sectors lower; energy leads declines

* STOXX 600 down ~2.3%

* Dollar up; gold ~flat; oil plunges

* U.S. Treasury 10-yr yield 1.19%

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NAHB: HOMEBUILDERS STILL SMILING, BUT NOT AS BROADLY (1105 EDT/1505 GMT)

The first of a spate of housing market indicators was released on Monday, which should provide a fairly broad view of a sector which, until recently, had been the undisputed star of the pandemic recession recovery.

And today's report said that homebuilders, while still whistling a happy tune, unexpectedly lost a little spring in their step last month.

The National Association of Homebuilders (NAHB) housing market index shed 1 point in June to a reading of 80, as opposed to the 2-point gain expected by economists.

A reading above 50 indicates optimism in the sector.

From the onset of the pandemic, which sent homebuyers stampeding for the suburbs on a quest for elbow room and home office space, the resulting dip in supply of homes on the market positioned homebuilders favorably.

But the demand deluge has also collided with a supply drought of building materials - particularly lumber - which has sent costs, and home prices, into the stratosphere.

As a result, home affordability has been drifting further from the grasp of many potential buyers, especially at the lower end of the market.

"Builders are contending with shortages of building materials, buildable lots and skilled labor as well as a challenging regulatory environment," writes NAHB chairman Chuck Fowke. "This is putting upward pressure on home prices and sidelining many prospective home buyers even as demand remains strong in a low-inventory environment."

While the index remains above its pre-COVID level, as Ian Shepherdson, chief economist at Pantheon Macroeconomics points out, there are rocks in the road ahead.

"Sales are tracking the near-30% drop in mortgage applications since the peak late last year, and further declines are likely," Shepherdson says. "Homebuilders' sentiment remains high, in part because low inventory is boosting selling prices and margins, but buyer traffic fell six points in July; that was the biggest fall since last April's crash."

Later in the week, housing starts, building permits, mortgage demand and existing home sales will round out the picture.

Through much of the pandemic housing stocks have outperformed the broader market. But that outperformance began to fade in May.

Over the last 12 months, the S&P 1500 Homebuilding index

and the Philadelphia SE Housing index are up 35.7% and 32.7%, respectively, more or less in line with the S&P 500's 34.2% advance over the same time period.

Wall Street was taking a dive in morning trading as spiking infections of the COVID-19 Delta variant and fears of renewed lockdowns sent investors fleeing for safety.

All three major U.S. stock indexes were sharply lower, with the S&P 500 and the Nasdaq setting course for their biggest percentage drops in two months, and the Dow on track for its worst day since October.

(Stephen Culp)

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TREASURY PURCHASES BY CHINA MAY HAVE ADDED TO RECENT RALLY-TD (1030 EDT/1440 GMT)

Large purchases of Treasuries by China's central bank may have been a factor driving the recent rally in U.S. Treasuries, TD Securities said, as economic growth concerns sparked by a rise in COVID cases on Monday also sent yields to five-month lows.

Benchmark 10-year note yields fell to as low as 1.176% on Monday, the lowest since Feb. 12. They have dropped from 1.776% in March.

"It does seem like global growth worries are out front this morning, just because the COVID infection rate is picking up," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

In recent weeks, large purchases by China's central bank may also have added to the Treasuries rally as it pushes back against a strengthening yuan and accumulates dollars, Goldberg said.

"The evidence is pointing to some big buyer continuing to weigh on rates here and I think it’s certainly possible that they are the ones doing it, or at least that they are a contributor," Goldberg said.

Yields been falling in recent weeks on concerns that much of much of the boost from business reopenings may have occurred and that the Federal Reserve may be closer to tightening monetary policy, which will slow growth and weigh on inflation.

Much of the move has been from Investors unwinding “reflation” bets after the Fed’s “hawkish” June meeting, TD said.

The Fed surprised markets after its June meeting showed that U.S. central bank officials moved their first projected rate increases from 2024 into 2023.

(Karen Brettell)

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U.S. STOCKS FALL MORE THAN 1% AS VIRUS CASES SPIKE (0950 EDT/1350 GMT)

The three major U.S. stock indexes were each down more than 1% just after the open on Monday as a spike in COVID-19 cases raised fresh worries about economic growth.

Airline and other travel-related stocks fell sharply.

At the same time, the yield on the benchmark 10-year U.S. Treasury note fell to a five-month low amid the fears over the spread of the Delta variant of the coronavirus, and bank shares dropped.

New infections surged in parts of Asia and England, while U.S. COVID-19 cases soared 70% last week.

Investors also will focus this week on a pickup in second-quarter earnings reports.

Here is the early market snapshot:

(Caroline Valetkevitch)

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