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Disappointing Service Data Leads To Weakness On Wall Street - U.S. Commentary

Wallstreet3 111212 06Jan14

Stocks moved mostly lower over the course of the trading day on Monday, extending the pullback seen throughout the first few trading days on 2014. A disappointing reading on service sector activity contributed to the continued weakness.

The major averages ended the day in negative territory but off their worst levels of the session. The Dow fell 44.89 points or 0.3 percent to 16,425.10, the Nasdaq dropped 18.23 points or 0.4 percent to 4,113.68 and the S&P 500 slid 4.60 points or 0.3 percent to 1,826.77.

The weakness on Wall Street was partly in reaction to a report from the Institute for Supply Management showing that activity in the U.S. service sector unexpectedly grew at a slower rate in December.

The ISM said its non-manufacturing index edged down to 53.0 in December from 53.9 in November, although a reading above 50 still indicates growth in the service sector. With the drop, the index fell to its lowest level since hitting 52.8 in June.

The modest decrease came as a surprise to economists, who had been expecting the index to creep up to a reading of 54.8.

The unexpected decrease by the headline index was partly due to a downturn by new orders, as the new orders index tumbled to 49.4 in December from 56.4 in November.

However, Anthony Nieves, chair of the ISM Non-Manufacturing Business Survey Committee, said, "Despite the substantial decrease in the New Orders Index, respondents' comments predominately reflect that business conditions are stable."

Traders seemed to shrug off a separate report from the Commerce Department showing that factory orders rose by more than expected in November.

The report said factory orders increased by 1.8 percent in November following a revised 0.5 percent decrease in October. Economists had expected orders to rise by 1.6 percent.

The factory orders report may have been viewed as old news considering that the data came from before the Federal Reserve's recently announced decision to begin scaling back its asset purchases.

Sector News

Extending a recent pullback, steel stocks turned in some of the market's worst performances on the day. The NYSE Arca Steel Index dropped by 1.5 percent, pulling back further off the eleven-month closing high it set last Tuesday.

AK Steel (AKS) helped to lead the steel sector lower, sliding by 3.6 percent, while Schnitzer Steel (SCHN) and Ternium (TX) also posted notable losses.

Considerable weakness was also visible among airline stocks, with the NYSE Arca Airline Index falling by 1.5 percent after ending Friday's trading at its best closing level in over eleven years.

Housing stocks also saw significant weakness on the day, as reflected by the 1.4 percent drop by the Philadelphia Housing Sector Index. The index continued to pull back off the seven-month closing high set on the last trading day of 2013.

Railroad, software, trucking and retail stocks also came under pressure, moving lower along with most of the other major sectors.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Monday. Japan's Nikkei 225 Index tumbled by 2.4 percent, while Hong Kong's Hang Seng Index ended the day down by 0.6 percent.

Meanwhile, the major European markets turned in a mixed performance on the day. While the U.K.'s FTSE 100 Index closed just above the unchanged line, the German DAX Index edged down by 0.1 percent and the French CAC 40 Index fell by 0.5 percent.

In the bond market, treasuries moved to the upside after ending the previous session modestly lower. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 3.4 basis points to 2.961 percent.

Looking Ahead

Trading on Tuesday could be impacted by the release of a report on the U.S. trade balance in the month of November. Economists expect the trade deficit to narrow to $39.9 billion.

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