* Surprise contraction in U.S. factory sector slams markets
* Euro slides as euphoria ebbs over last week’s debt crisis deal
* Weak European and Asian data also weighs on market sentiment
By Herbert Lash
NEW YORK, July 2 (Reuters) - Stocks retreated and the euro slipped o n M onday, hurt by weak manufacturing data from around the world, while investor euphoria over last week’s deal on the European debt crisis ebbed.
U.S. stocks and an index of global equity markets turned lower after a report on U.S. manufacturing showed the sector unexpectedly contracted in June for the first time in nearly three years as new orders tumbled.
Euro zone manufacturing also took another hefty blow in June while China and Japan, Asia’s biggest exporters, were hit by crumbling orders from abroad, intensifying worries that the global economy is deteriorating.
Still, stocks where remarkably resilient, with the Nasdaq rebounding slightly by midday. Investors said the weak data was increasing hopes that the Federal Reserve would intervene to boost the U.S. economy with more easy money policies.
”I would think that the market would be down far more than it is and I think it’s because there is some underlying support from Federal policy,“ said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.”
The Dow Jones industrial average was down 36.02 points, or 0.28 percent, at 12,844.07. The Standard & Poor’s 500 Index was down 0.85 points, or 0.06 percent, at 1,361.31. The Nasdaq Composite Index was up 1.86 points, or 0.06 percent, at 2,936.91
European equities ended at a two-month closing high on investor anticipation of further action after the European Union agreed on Friday to measures to cut soaring borrowing costs in Italy and Spain, while directly recapitalizing regional banks.
The pan-European FTSEurofirst 300 index closed 1.4 percent higher at 1,035.32 points.
The euro extended its slide against the dollar after the Institute for Supply Management report on U.S. manufacturing. Oil prices slid on concerns the world economy was deteriorating more quickly than anticipated and safe-haven bonds rose.
The ISM report marked the first time since July 2009 that the index has fallen below the 50 level that separates expansion from contraction.
“This is clearly very, very troubling,” said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York. “It indicates that at least in the month of June, the manufacturing sector of the economy contracted and there is meaningful evidence of, at a minimum, disinflation,” he said.
The euro fell after Finland and the Netherlands opposed a plan for the euro zone’s permanent bailout fund to buy government bonds in the secondary market, casting doubt on the deal announced Friday to keep Spain and Italy from falling deeper into the debt and banking crisis.
The euro was last trading at $1.2588.
Spanish bond yields rose as euphoria over the euro zone deal to stabilize debt markets ebbed on concern over potential implementation hurdles and the uncertain global growth outlook.
Spanish 10-year government bond yields reversed earlier falls to end higher.
U.S. Treasury debt prices rose on safe-haven buying as weak Asian data spurred worries over the pace of global growth, although gains were tempered after last week’s agreement to give euro zone rescue funds more flexibility.
The benchmark 10-year U.S. Treasury note was up 20/32 in price to yield 1.5749 percent.
The weak ISM reading sets the stage for a soft non-farm June payrolls report o n F riday and a new round of quantitative easing, or QE3, in the near future, said Joe Manimbo, a market analyst at Western Union Business Solutions in Washington.
“On the surface, it can increase the chance that we could see QE3 this year, so that can certainly cap the dollar’s upside,” Manimbo said.
U.S. crude futures extended losses in volatile trading after the weak ISM reading. But news that Iranian lawmakers have a draft bill proposing a blockade of the Strait of Hormuz helped limit losses.
Brent crude futures fell $1.65 to $96.15 a barrel, while U.S. crude futures were down $2.17 at $82.79 a barrel.
Spot gold prices rose $1.29 to $1,599.40 an ounce in choppy trading.