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Disappointing business activity data and other signals of a weak economy left the benchmarks languishing in the red on Friday. Benchmarks also ended the week on a losing note. However, markets registered their best third quarter since 2010. The S&P 500 jumped a significant 5.9% in the third quarter.

The Dow Jones Industrial Average (DJI) lost 0.4% to end at 13,437.13. The Standard & Poor 500 (S&P 500) slipped 0.5% to finish Friday’s trading session at 1,440.67. The tech-laden Nasdaq Composite Index declined 0.7% to close at 3,116.23. The fear-gauge CBOE Volatility Index (VIX) rose 6% to settle at 15.73. Consolidated volumes on the New York Stock Exchange, American Stock Exchange and the Nasdaq were roughly 6.15 billion shares, short of the year-on-year daily average volume of 6.38 billion. Declining stocks outpaced the advancers on the NYSE; as for 59% stocks that dropped, 38% stocks moved higher.

For the week, the Dow slipped 1%, the S&P 500 shed 1.3% and Nasdaq lost 2%. Benchmarks suffered through the week as a number of disappointing developments on the domestic and international fronts affected markets. Amidst these dismal developments, a small number of encouraging economic reports failed to boost investor sentiment.

Earlier in the week, the German business confidence had suffered a larger-than-expected decline in September, which was followed by comments from a key Fed official that the central bank’s bond buying program will not be effective enough to accelerate growth or improve the employment scenario. Also, most of the economic readings were discouraging. Among them, new home sales and pending home sales declined in August. Separately, durable orders reported a sharp fall in August and the final reading of second quarter GDP growth fell short of consensus estimates. Despite these encouraging reports, initial claims dropped sharply and consumer confidence improved.

Coming back to Friday’s developments, a decline in new orders dented business activity in the U.S. Midwest in September, which shrank to its lowest level since September 2009. The Thomson Reuters/University of Michigan Index dropped to 78.3 in September, down from 79.2 in August and was also short of consensus expectations of 78.7. Separately, the Chicago Purchase Managers Index decreased to 49.7 in September, down from 53 in August and lower than consensus estimates of 52.9.

Meanwhile, the U.S. Department of Commerce said Personal Consumption Expenditures (PCE) had increased 0.5% in August, up from 0.4% in July. This was in line with consensus estimates. Consumer spending recorded the highest jump in six months.  A hike in gasoline prices resulted in the jump in consumer spending. Personal income increased by 0.1% in August, flat with the July level. The figure came in short of consensus estimates of 0.2%.

Coming to developments abroad, stress tests results for Spanish banks was released on Friday. Seven Spanish banks failed to qualify the stress test, which was however within expectations. Also, an independent audit of Spain's 14 major banks by consultant Oliver Wyman noted that around 59.3 billion euros ($76.3 billion) would be required to revive these banks.

However, the region continued to keep investor sentiment gloomy after ratings agency Egan-Jones downgraded the sovereign rating of Spain to ‘junk’. The nation thereafter awaited Moody’s verdict on its sovereign rating.

Coming to the sectors, housing was a major loser on Friday and the SPDR S&P Homebuilders (XHB) plunged 0.8%. Among the stocks, Hovnanian Enterprises, Inc. (NYSE:HOV), Beazer Homes USA, Inc. (NYSE:BZH), Standard Pacific Corp. (NYSE:SPF), The Ryland Group, Inc. (NYSE:RYL) and KB Home (NYSE:KBH) lost 3.1%, 3.0%, 2.7%, 2.6% and 1.8%, respectively.

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