* Oil prices retreat; China factory activity slows
* Nike drops after Morgan Stanley downgrade
* Michael Kors jumps on strong sales growth
* Indexes down: Dow 0.67 pct, S&P 0.56 pct, Nasdaq 0.44 pct (Updates to open)
By Tanya Agrawal
June 1 (Reuters) - U.S. stocks started the month in the red on Wednesday as falling oil prices and weak factory data from China reduced the chances of a rate hike this month, dragging on financial stocks.
JPMorgan, Bank of America and Citigroup were all down between 1.3-2.0 percent. The financial sector was down 0.96 percent and was the biggest drag on the S&P 500.
China's official factory activity gauge expanded only marginally in May, data showed, while a private survey showed conditions deteriorated for a fifteenth straight month.
"This data is a barometer, to many, of economic activity and growth," said Andre Bakhos, managing director at Janlyn Capital in Bernardsville, New Jersey. "Any hiccup, any speed bump in China will thwart upside activity."
U.S. consumer confidence dipped, data on Tuesday showed, while a survey on business activity in U.S. Midwest also underwhelmed.
That does not bode well for the Institute of Supply Management's manufacturing survey for May, due at 10 a.m. ET, with traders saying that a weak reading could see chances of a rate hike in June recede.
Traders are now pricing only a 15 percent chance of a hike in June, down from a probability of around 32 percent on Monday, according to the CME Group FedWatch tool.
The Federal Reserve caught investors off guard earlier this month when it signaled its next rate hike could be as soon as its June 14-15 meeting.
At 9:35 a.m. ET (1335 GMT), the Dow Jones industrial average was down 119.33 points, or 0.67 percent, at 17,667.87.
The S&P 500 was down 11.64 points, or 0.56 percent, at 2,085.32.
The Nasdaq Composite was down 21.99 points, or 0.44 percent, at 4,926.06.
Oil majors Exxon and Chevron were down about 1 percent as crude prices fell on expectations of OPEC inaction on output due to its focus stays firmly on market share, while concerns about China weighed on the demand outlook..
"The market also keeps an eye on oil as another economic barometer. Weak oil, weak economy. Strong oil, stable economy," Bakhos said.
Nine of the 10 major S&P sectors were lower, with the material index's 1 percent fall leading the decliners.
Shares of Nike fell 3 percent to $53.52 after a Morgan Stanley downgrade on higher chances of a slowdown in U.S. sales due to competition and a weakening U.S. market.
Handbag maker Michael Kors rose 6.2 percent to $45.23 after posting its strongest sales growth in a year and announcing a new share buyback.
Demandware soared 56 percent to $74.87 after Salesforce.com agreed to buy the company in a $2.8 billion deal. Salesforce was down 1.1 percent at $82.79.
Declining issues outnumbered advancing ones on the NYSE by 1,939 to 724. On the Nasdaq, 1,443 issues fell and 742 advanced.
The S&P 500 index showed one new 52-week high and no new lows, while the Nasdaq recorded nine new highs and seven new lows. (Reporting by Tanya Agrawal; Additional reporting by Mamidipudi Soumithri; Editing by Savio D'Souza)