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* U.S. air strike in Iraq kills head of Iran's Quds Force
* Manufacturing sector contraction sparks slowdown fears in
* Bank stocks fall as bond yields slide
* Energy stocks, gold miners track higher commodity prices
* Indexes down: Dow 0.60%, S&P 0.43%, Nasdaq 0.37%
(Updates prices)
By Manas Mishra and Medha Singh
Jan 3 (Reuters) - Wall Street fell from a record high on
Friday after a U.S. air strike in Iraq ratcheted up tensions in
the Middle East, while a bigger-than-expected contraction in the
U.S. manufacturing sector again fanned fears of slowing economic
growth.
Demand for safe-haven assets soared as Iran vowed revenge
for the killing of Qassem Soleimani, head of its elite Quds
Force, in an air strike authorized by President Donald Trump.
The banks sub-sector .SPXBK dropped about 1% as the news
sent benchmark U.S. bond yields US10YT=RR to their lowest
since Dec. 12. Eight of the 11 S&P 500 sectors were in the red,
with only sectors considered defensive plays, such as real
estate .SPLRCR , trading higher.
"The sharp escalation in tensions related to the Middle East
is certainly driving the trading narrative for U.S. stocks,"
said Peter Kenny, founder of Kenny's Commentary LLC in New York.
"Does it mean continued escalation in tension (and) will it
end up derailing the U.S. equity rally? I don't think so, but
it's worth considering."
The three main stock indexes had closed at record highs on
Thursday, as fresh monetary stimulus by China added to investor
optimism over trade.
However, denting sentiment on Friday, data showed the U.S.
manufacturing sector contracted in December by the most in more
than a decade. At 12:43 p.m. ET, the Dow Jones Industrial Average .DJI
was down 173.13 points, or 0.60%, at 28,695.67, the S&P 500
.SPX was down 14.10 points, or 0.43%, at 3,243.75. The Nasdaq
Composite .IXIC was down 33.40 points, or 0.37%, at 9,058.79.
Safe-haven assets such as gold surged after the air strike,
boosting shares of miners Newmont Goldcorp NEM.N , Kirkland
Lake Gold Ltd KL.N and Barrick Gold Corp GOLD.N between 0.3%
and 0.8%.
Weapons makers Lockheed Martin Corp LMT.N and Northrop
Grumman Corp NOC.N were the biggest boost to the S&P 500
index, gaining more than 4% after the air strike in Iraq.
Meanwhile, oil prices jumped about 2%, denting shares of
American Airlines Group Inc AAL.O and Southwest Airlines Co
LUV.N . Meanwhile, Tesla Inc TSLA.O shares hit a fresh record high
after beating estimates for vehicle deliveries in the fourth
quarter. Declining issues outnumbered advancers for a 1.17-to-1 ratio
on the NYSE and a 1.50-to-1 ratio on the Nasdaq.
The S&P index recorded 16 new 52-week highs and one new low,
while the Nasdaq recorded 45 new highs and 10 new lows.