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Stocks Show Significant Recovery Attempt From Initial Sell-Off - U.S. Commentary


After moving sharply lower at the open, stocks have shown a substantial recovery attempt over the course of the first trading day of 2019 on Wednesday. The major averages have bounced well off their lows of the session, briefly climbing into positive territory.

Currently, the major averages are posting modest losses. The Dow is down 87.68 points or 0.4 percent at 23,239.78, the Nasdaq is down 2.80 points or less than a tenth of a percent at 6,632.47 and the S&P 500 is down 7.82 points or 0.3 percent at 2,499.03.

The initial sell-off on Wall Street came amid lingering concerns about the outlook for to the global economy following the release of a report showing a contraction in Chinese manufacturing activity in the month of December.

The report said the Caixin/Markit manufacturing purchasing managers' index edged down to 49.7 in December from 50.2 in November. The reading below 50 indicated the first contraction in nineteen months.

Iris Pang, Greater China Economist at ING, noted the disappointing manufacturing data comes on the heels of reports showing an annual drop in industrial profits and softer retail sales growth.

"We believe that the data reflect that not only has the trade war damaged growth in the export sector. It has also hurt export-related supply chain companies and in turn, domestic demand," Pang said.

"If domestic demand is not supported by fiscal stimulus quickly, then further weakening will pose a risk to job security," she added. "That could create a vicious downwards cycle."

Selling pressure waned shortly after the start of trading, however, inspiring some traders to pick up stocks at reduced levels following the steep losses posted last year.

Traders are also keeping an eye on the White House as President Donald Trump has invited congressional leaders to a meeting this afternoon.

The meeting comes as the partial government shutdown has entered its twelfth day due to an impasse over funding for Trump's controversial border wall.

Democrats are due to take control of the House on Thursday and intend to move forward with plans to reopen the government without providing funding for the wall, although the White House has called the plan a "non-starter."

Sector News

Energy stocks have shown a significant move to the upside over the course of the session, benefiting from a sharp increase by the price of crude oil. Crude for February delivery is jumping $1.65 to $47.06 a barrel after hitting a low of $44.35 a barrel.

Reflecting the strength in the energy sector, the NYSE Arca Natural Gas Index has spiked by 2.9 percent, the Philadelphia Oil Service Index is up by 2.2 percent and the NYSE Arca Oil Index is up by 1.0 percent.

Considerable strength has also emerged among gold stocks, with the NYSE Arca Gold Bugs Index surging up by 1.2 percent. The strength in the sector comes as gold for February delivery is climbing $5.20 to $1,286.50 an ounce.

On the other hand, notable weakness remains visible among interest rate-sensitive commercial real estate and utilities stocks, dragging the Dow Jones Real Estate Index and the Dow Jones Utility Average down by 1.9 percent and 1.8 percent, respectively.

Healthcare, pharmaceutical, and software stocks also continue to see significant weakness, offsetting the strength that has emerged among resource stocks.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved sharply lower on Wednesday, although the Japanese markets remained closed. Hong Kong's Hang Seng Index plummeted by 2.8 percent, while China's Shanghai Composite Index slumped by 1.2 percent.

Meanwhile, the major European markets turned in a mixed performance on the day. While the French CAC 40 Index slid by 0.9 percent, the U.K.'s FTSE 100 Index and the German DAX Index edged up by 0.1 percent and 0.2 percent, respectively.

In the bond market, treasuries have pulled back off their highs of the session but continue to see modest strength. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is down by 1.8 basis points at 2.668 percent.

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