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Major Averages Close Higher After Recovering From Initial Drop - U.S. Commentary


After recovering from an initial move to the downside, stocks fluctuated over the course of the first trading day of 2019 on Wednesday. The major averages spent the afternoon bouncing back and forth across the unchanged line.

Eventually, the major averages ended the day in positive territory. The Dow edged up 18.78 points or 0.1 percent to 23,346.24, the Nasdaq climbed 30.66 points or 0.5 percent to 6,665.94 and the S&P 500 inched up 3.18 points or 0.1 percent to 2,510.03.

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 also kept an eye Washington 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."

In remarks to reporters ahead of the meeting, Trump indicated the partial government shutdown will continue for "as long as it takes," standing by his demand for $5 billion for the border wall.

The meeting is not expected to result in a major breakthrough in negotiations, with a Capitol Hill source telling CNN the meeting "appears to be more of a White House stunt than a serious attempt to have a discussion."

Sector News

Energy stocks showed a substantial move to the upside over the course of the session, benefiting from a significant rebound by the price of crude oil. Crude for February delivery jumped $1.13 to $46.54 barrel after hitting a low of $44.35 a barrel.

Reflecting the strength in the energy sector, the NYSE Arca Natural Gas Index spiked by 2.9 percent, while the Philadelphia Oil Service Index and the NYSE Arca Oil Index surged up by 2.2 percent and 1.9 percent, respectively.

Considerable strength also emerged among banking stocks, as reflected by the 1.8 percent jump by the KBW Bank Index. The index continued to recover after ending Christmas Eve at its lowest closing level in two years.

On the other hand, notable weakness remained 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 2.1 percent and 1.7 percent, respectively.

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 extended the strong upward move seen in the previous session. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 2.5 basis points to an eleven-month closing low of 2.661 percent.

Looking Ahead

Trading on Thursday may be impacted by reaction to U.S. reports on private sector employment, weekly jobless claims and manufacturing activity.

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