Wall Street fell overnight as the latest data on China's services industries raised concern about the strength of the world's second-largest economy, just as US$85 billion of US federal spending cuts are kicking in.
China's non-manufacturing Purchasing Managers' Index slid to 54.5 in February from 56.2 in January, according to the National Bureau of Statistics and China Federation of Logistics and Purchasing. That was the weakest reading since September.
In addition, plans by the Chinese government to further rein in its property market - in part by requiring larger down payments - heightened worries about the nation's economic outlook.
In afternoon trading in New York, the Dow Jones Industrial Average and the Nasdaq Composite Index both slid 0.33 per cent, while the Standard & Poor's 500 Index declined 0.39 per cent.
The mood on Wall Street, however, remains optimistic as investors count on the Federal Reserve's promises to maintain its support for the American economic recovery.
"At present, I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more-rapid growth in employment," Fed Vice Chair Janet Yellen said in a speech in Washington today.
Yellen is seen as the top candidate to succeed Ben Bernanke after his current term expires in 2014.
Even with this year's equity gains, which have lifted the Dow to within 1 per cent of its all-time high, analysts still see value.
"We are hitting a bit of technical resistance here, but the momentum is still there and the market is still seen undervalued. It could be anything that pushes the market above this level soon," Robert Pavlik, chief market strategist at Banyan Partners, told Reuters.
Indeed, Warren Buffett indicated in an interview with CNBC-TV that he is eyeing a takeover in an industry he didn't want to mention other than saying it was not a consumer-products company.
"If we get a chance to buy another Heinz, we will do that," Buffett said, referring to a recent deal in which Berkshire combined with a private equity firm to take over the ketchup maker.
Some warn, however, that the bulls are skating on thin ice.
Short sales in the S&P 500 fell to 5.6 per cent of shares available for trading in February, down from a record 12 per cent during the credit crisis and the lowest ever in data compiled by Bespoke Investment Group and Bloomberg starting six years ago. The last time the number of shares borrowed and sold short approached this level, the equity gauge lost 3.3 per cent in the next three months.
"When you look at short interest, and it's low like right now, it means people are very, very bullish about the market," Uri Landesman, president of New York-based hedge fund Platinum Partners, told Bloomberg News. "When that happens, it's a bearish sign, because if all minds change, there's downside, not upside."
In Europe, the Stoxx 600 Index finished the day almost 0.1 per cent weaker than the previous close. The UK's FTSE 100 dropped 0.5 per cent, while Germany's DAX gave up 0.2 per cent.
Shares of HSBC fell 2.5 per cent as Europe's biggest bank reported a slide in full-year profit and signalled that it doesn't yet have its costs under control.