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Stocks Close Substantially Lower Amid Global Sell-Off - U.S. Commentary

Wallstreet3 111212 24Jan14

Stocks moved sharply lower over the course of the trading day on Friday, as weakness in other markets generated substantial selling pressure. The losses on the day extended the notable downward move seen in the previous session.

The major averages saw further downside going into the close, ending the session at their worst levels of the day. The Dow plummeted 318.24 points or 2 percent to 15,879.11, the Nasdaq dove 90.70 points or 2.2 percent to 4,128.17 and the S&P 500 plunged 38.17 points or 2.1 percent to 1,790.29.

For the first time in over a month, the Dow and the S&P 500 closed below 16,000 and 1,800, respectively. The major averages also fell sharply for the week, with the Dow tumbling by 5.3 percent and seeing its worst week since 2012.

The continued weakness on Wall Street was partly due to a sharp pullback by overseas markets, with stocks in both Asia and Europe seeing significant weakness on the day.

Yesterday's disappointing reading on Chinese manufacturing activity continued to generate negative sentiment regarding the outlook for the global economy.

The report from Markit and HSBC showed that their index of Chinese manufacturing activity fell to 49.6 in January from 50.5 in December, with a reading below 50 indicating a contraction. Economists had expected a more modest drop to 50.3.

A sell-off in emerging-market currencies also weighed on the markets amid concerns about China, political unrest, and U.S. monetary policy.

Peter Boockvar, chief market analyst at the Lindsey Group, said, "Emerging market currencies plunge and global stocks follow as we witness the flip side of the QE coin where all warts and blemishes come to the surface."

"QE creates an at the money put and without it, the strike price goes out of the money, potentially far out," Boockvar added.

Despite the pullback by the broader markets, shares of Microsoft (MSFT) moved higher on the day after the software giant reported better than expected second quarter results.

Coffee giant Starbucks (SBUX) also bucked the downtrend after reporting first quarter earnings that exceeded estimates and raising its full-year earnings guidance.

Sector News

Most of the major sectors showed significant moves to the downside, reflecting the broad based nature of the sell-off on Wall Street.

Transportation stocks posted particularly steep losses on the day, dragging the Dow Jones Transportation Average down by 4.1 percent. With the loss, the average pulled back well off the record closing high set on Thursday.

Kansas City Southern (KSU) helped to lead the transportation sector lower, with the railroad company plummeting by 15.2 percent after reporting weaker than expected fourth quarter earnings.

Significant weakness was also visible among steel stocks, as reflected by the 3.7 percent loss posted by the NYSE Arca Steel Index. The loss extended a recent downward move by the index, which fell to its lowest closing level in over three months.

Computer hardware stocks also saw considerable weakness, pulling back off their recent highs. The NYSE Arca Computer Hardware Index tumbled by 3.4 percent after ending Thursday's trading at a record closing high.

Biotechnology, housing, defense, and chemical stocks also moved sharply lower on the day, while gold stocks saw relatively modest weakness.

Other Markets

As mentioned above, most stock markets across the Asia-Pacific region saw considerable weakness during trading on Friday. Japan's Nikkei 225 Index plummeted by 1.9 percent, while Hong Kong's Hang Seng Index slumped by 1.3 percent.

The major European markets also showed substantial moves to the downside on the day. While the U.K.'s FTSE 100 Index dropped by 1.6 percent, the German DAX Index and the French CAC 40 Index plunged by 2.5 percent and 2.8 percent, respectively.

In the bond market, treasuries moved notably higher, extending the rally seen in the previous session. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 3.8 basis points to a nearly two-month closing low of 2.735 percent.

Looking Ahead

The Federal Reserve will move back into the spotlight next week, as the central bank is due to hold a two-day monetary policy meeting ending on Wednesday.

Traders are likely to keep a close eye on the Fed's comments regarding the outlook for its asset purchase program following December's decision to begin tapering.

Reports on new home sales, durable goods orders, fourth quarter GDP, and personal income and spending are also likely to attract some attention.

On the earnings front, Apple (AAPL), Caterpillar (CAT), Ford (F), AT&T (T), Yahoo (YHOO), Boeing (BA), Facebook (FB), 3M (MMM), Exxon Mobil (XOM), Amazon (AMZN), and Google (GOOG) are among the slew of big-name companies due to report their quarterly results next week.

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