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U.S. Stocks on Course to Pull Back Slightly After Rally

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10/04/2017 | 03:56pm CEST
By Riva Gold and Kenan Machado 
   -- Hang Seng, Nikkei end at 2-year highs 
 
   -- Dollar, bond yields lower 
 
   -- Spain weighs down European stocks 

A rally in global stocks showed signs of stalling Wednesday as tensions in Catalonia dragged down Spanish bank shares.

The Dow Jones Industrial Average added 9 points, or less than 0.1%, to 22651 shortly after the opening bell. The S&P 500 fell less than 0.1% after it clinched a record high Tuesday -- its 41st this year. The Nasdaq Composite declined 0.1%.

Shares of technology companies declined after the European Union upped the stakes in its push to collect taxes from U.S. tech giants and news hit that Yahoo's data breach in 2013 was far more extensive than previously disclosed.

The Stoxx Europe 600 fell 0.2%, meanwhile, after rising for nine straight sessions, the longest run since July 2015.

Spain's IBEX 35 index led global declines -- falling 2.3% and bringing this week's losses to 3.5% -- as investors continued to weigh the implications of escalating tensions around Catalonia. The king of Spain accused Catalan leaders of pushing the country toward a constitutional crisis Tuesday, with the region's officials pledging to declare independence within days.

Shares of Catalonia's largest banks, Banco de Sabadell and CaixaBank, fell 5.9% and 6%, respectively, while Banco Santander fell 3.3%. The three banks have, however, significantly outpaced the average European stock in gains so far this year.

Moody's Investors Service this week warned the escalating conflict over independence could have negative credit implications for Spain because it complicates the legislative process. Yields on 10-year Spanish government bonds rose to 1.760% from 1.714% Tuesday, bucking a global trend of declines.

"Catalonia is such an integral part of the overall economy," said Patrick O'Donnell, senior investment manager at Aberdeen Standard Investments. Still, he doesn't see an immediate spillover to other assets across Europe because the situation doesn't pose an existential threat to the eurozone.

Companies making up the Stoxx Europe 600 index generate just 3.5% of their revenue from Spain, according to FactSet.

Yields on Italian debt have also climbed relative to Germany's ultrasafe debt this week and Italy's FTSE MIB Index fell 1.2% Wednesday, although many investors say that may have more to do with investor concerns about Italy's own political and economic situation. Data Wednesday showed Italy's last purchasing managers index falling even as Spain's edged higher.

"What's happening in Spain is a little worrying [...] but I don't think it's going to be a strain on the country's economy in terms of debt leverage, and Italian elections coming up will be more important for Europe," said Patrick Spencer, vice chairman of equities at Robert W. Baird & Co.

The euro was up 0.2% Wednesday at $1.1768 despite the political uncertainty and data showing a fall in eurozone retail sales.

Earlier, stocks climbed in Asia after upbeat car-sales data and rising airline stocks propelled U.S. benchmarks to new records.

Hong Kong's Hang Seng Index rose 0.7% to its highest close since April 2015. China's central bank gave Hong Kong stocks a boost with its announcement Saturday that it would free up more long-term funds in January for banks to lend to small and private businesses. That is expected to help small businesses withstand Beijing's effort to lessen overall leverage in China's economy.

But this action by the People's Bank of China could also stoke worries about China's economy, said Ivan Li, a market strategist at DBS Vickers in Hong Kong.

"I think this speculation has some ground," he added, also noting that talk could ultimately spur profit-taking in Hong Kong stocks.

Markets in China, South Korea and Taiwan markets were closed, crimping overall liquidity.

In Australia the S&P ASX 200 fell 0.9%, putting it back into negative territory for 2017. Australia's big banks, miners and oil companies were off more than 1%.

Japan's Nikkei Stock Average rose 0.1% -- ending at its highest since August 2015 -- despite a rebound in the yen.

The WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, was down 0.2%, with many currency investors speculating on the next chair of the Federal Reserve following media reports of a short list of recommended candidates.

Yields on 10-year Treasury notes fell to 2.311% Wednesday from 2.332% and German bund yields fell to 0.423% from 0.462%. Yields move inversely to prices.

Write to Riva Gold at [email protected] and Kenan Machado at [email protected]

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