By Caroline Valetkevitch
NEW YORK (Reuters) - World stock markets were up slightly on Tuesday but cut gains after U.S. congressional leaders voiced support for military intervention in Syria, while bond yields rose and the dollar gained on strong U.S. data.
Wall Street stocks rallied at the opening after President Barack Obama said over the weekend that he would seek approval from Congress for a Syria strike, delaying the threat to Middle East stability and oil supplies. The market pulled back after comments from Republican House Speaker John Boehner expressing support for action.
"Syria is the key thing facing markets, and stocks don't know what to expect when there's geopolitical uncertainty, especially with respect to the Middle East," said Mark Martiak, senior wealth strategist at Premier Wealth/First Allied Securities in New York.
"All you know is that you can expect volatility, and that's why we're seeing stocks come off their highs."
Data showing U.S. manufacturing activity growth hit its fastest pace in more than two years helped the dollar and boosted U.S. bond yields. The data bolsters expectations the Federal Reserve will begin to reduce bond purchases when it concludes its meeting on September 18.
The U.S. Congress returns from its summer recess on September 9, and will vote on authorizing a strike on Syria. While Obama has been pushing Congress to back his plan, passage is by no means certain.
Nancy Pelosi, Democratic leader in the House of Representatives, said she believes Congress will support a resolution authorizing the use of U.S. military force against Syria.
On Wall Street, where markets were closed Monday for the Labor Day holiday, the Dow Jones industrial average was down 19.82 points, or 0.13 percent, at 14,790.49. The Standard & Poor's 500 Index was up 1.11 points, or 0.07 percent, at 1,634.08. The Nasdaq Composite Index was up 7.27 points, or 0.20 percent, at 3,597.14.
MSCI's world equity index, which tracks shares in 45 countries, was up 0.2 percent, while European stocks ended down 0.4 percent.
Shares of Microsoft
U.S. TREASURY SELLOFF RESUMES
The stronger U.S. data, combined with good data on the manufacturing sector from the eurozone and China published on Monday, caused selling in the U.S. bond market to resume.
The 10-year benchmark U.S. Treasury note was down 18/32, its yield at 2.854 percent.
The yield reached as high as 2.902 percent earlier, roughly 3 basis points below a 25-month high recorded on August 22, according to Reuters data.
China's non-manufacturing purchasing managers' index dropped slightly to 53.9 last month from July's 54.1. But it remained solidly in expansion territory and suggested recent government measures are supporting the economy.
Traders expect the Fed to start reducing its $85 billion-a-month stimulus program at its September 17-18 policy meeting unless U.S. payroll numbers due on Friday fall considerably short of forecasts.
The U.S. dollar jumped to a six-week high against major currencies after U.S. manufacturing activity data.
While expectations of a reduction in Federal Reserve bond purchases support the dollar, a near-term withdrawal of Fed stimulus would weigh on stocks, particularly those in emerging markets that have come under pressure in recent months on expectations of capital outflows.
The dollar index hit a high of 82.505, its highest since July 22. It last traded at 82.367, up 0.3 percent on the day.
Australia's dollar bounced more than half a cent as its central bank kept interest rates at a record low 2.5 percent, as expected, on Tuesday.
OIL GAINS
Brent crude oil futures rose more than $1 per barrel as U.S. lawmakers voiced support for military action against Syria. Oil prices also drew support from the improving economic data in the United States and China and concerns over crude oil supply.
Brent crude was up $1.38 to $115.71 a barrel. It hit a session high of $115.87. U.S. oil reached $108.25, up 60 cents from Friday's settlement. There was no Monday settlement for the U.S. benchmark due to the U.S. Labor Day holiday.
Rising crude price helped to lift gold. Spot gold was up 0.8 percent at $1,405.06 an ounce.
(Additional reporting by Ryan Vlastelica and Julie Haviv in New York; Editing by Patrick Graham, Clive McKeef and Dan Grebler)
