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* U.S. air strike in Iraq kills head of Iran's Quds Force
* Manufacturing sector contraction sparks slowdown fears
* Bank stocks fall as U.S. bond yields slide
* Energy stocks, gold miners track higher commodity prices
* Indexes off: Dow 0.80%, S&P 500 0.65%, Nasdaq 0.70%
(Updates price action)
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 the air strike that was authorized by President Donald
Trump. Bank of America Corp BAC.N and Citigroup Inc C.N fell
more than 1% as the news sent benchmark bond yields US10YT=RR
to their lowest level since Dec. 12. Nine of the 11 major S&P
500 sectors were in the red.
"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.
But denting sentiment on Friday, data showed the U.S.
manufacturing sector contracted in December by the most in more
than a decade. At 11:30 a.m. ET, the Dow Jones Industrial Average .DJI
was down 232.15 points, or 0.80%, at 28,636.65, while the S&P
500 .SPX was down 21.13 points, or 0.65%, at 3,236.72. The
Nasdaq Composite .IXIC was down 63.86 points, or 0.70%, at
9,028.33.
The CBOE Volatility index .VIX , an options-based gauge of
investor anxiety, hit its highest level since Dec. 10.
Safe-haven assets such as gold surged after the air strike,
boosting shares of miners Newmont Goldcorp NEM.N , Kirkland
Lake KL.N and Barrick Gold GOLD.N between 0.4% and 1.1%.
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 3% after the attack. Meanwhile, oil prices jumped about 4%, denting shares of
American Airlines Group Inc AAL.O and Southwest Airlines Co
LUV.N . The S&P 500 energy sector .SPNY fell 0.6%.
In a bright spot, Tesla Inc TSLA.O shares hit a fresh
record after beating estimates for vehicle deliveries in the
fourth quarter. Declining issues outnumbered advancers for a 1.50-to-1 ratio
on the NYSE and a 2.18-to-1 ratio on the Nasdaq.
The S&P index recorded 12 new 52-week highs and one new low,
while the Nasdaq recorded 29 new highs and nine new lows.