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Week Ahead: Europe May Rattle the Market's Cage

Europe will keep its chokehold on financial markets in the week ahead, as investors size up Greece’s commitment to the euro zone and watch for other headlines on the debt crisis.

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“Next week is only one of the four weeks we have to wait until the Greek election. Every utterance out of Greece makes us think about their [possible] exit and how sloppy that could be,” said Art Hogan of Lazard Capital Partners.

With just a few earnings and economic reports, there will be plenty of opportunity for markets to dwell on Europe and its problems. In the past week, investors began to reassess the possibility that Greece could leave the euro zone in a messy fashion, spurring bank runs in other weak peripheral countries.

While still not viewed as highly likely, those fears helped send buyers into the bond market, driving 10-year yields to historic lows. Stocks sold off, in their worst weekly performance of the year. The Dow in the past week was down 3.5 percent to 12,369, and the S&P 500 was off 4.3 percent to 1295. The Nasdaq was down 5.3 percent to 2778.

The markets are also watching the European banking sector, under review by Moody’s. Moody’s downgraded Italian and Spanish banks in the past week.

G8 leaders were to meet in Camp David over the weekend, and President Obama and leaders were to head to Chicago Sunday where NATO meets to discuss Afghanistan.

“The macro environment here is really getting very dicey and it happened quickly,” said Barry Knapp, head of equities portfolio strategy. Knapp said it’s not clear European nations are prepared to provide the policy response needed. “Could we get some headline out of the G8 over the weekend that could cause a short-term bounce? That’s possible, if not probable. What are you supposed to do with any bounce? — Sell it.”

In the past week, German Chancellor Angela Merkel and newly elected French President Francois Hollande both said Greece should stay in the euro zone. Greece’s failure to form a ruling coalition after its May 6 election has now led it to a second election in June. Polls show the radical left party is in the lead, and that party rejects austerity measures agreed to as part of the Greek bailout.

Alan Ruskin, Deutsche Bank G10 currency strategist, said some of the G8’s discussion is unlikely to be made public. “Even if there’s a very small possibility [of a Greek exit], policy makers should be drawing up contingency plans,” he said.

The euro lost about 1 percent against the dollar in the past week. The CFTC reports a record net speculative short position in the euro in the week ended Tuesday, notes Peter Boockvar, market strategist at Miller Taback.

Econorama

Existing home sales Tuesday and Thursday’s durable goods and weekly jobless claims top the week’s U.S. economic reports. German and euro zone PMI is reported Thursday, as is HSBC flash manufacturing PMI for China.

“I think that the economy has been slowing. It’s not as robust as it was; however, I would argue with disproportionate falling interest rates. Housing activity is picking up, gasoline prices are falling as we go into Memorial Day weekend. That can’t be bad. I think we have to be careful about getting too bearish,” said Richard Bernstein, CEO of Richard Bernstein Capital Management.

Bernstein said Europe’s problems are behind the decline in Treasury yields. The 10-year Thursday closed at a record low of 1.70. “We are benefiting from the rest of the world’s problems, and the dollar is strong … the world is moving to U.S. assets as they begin to reassess the risks around the world, and I think this is great for the U.S. economy longer term,” he said.

Knapp said Tuesday's Richmond Fed survey will be important because of the mixed results of the past week’s stronger Empire State survey, and the surprising decline in the Philadelphia Fed survey. Housing is also important.

“The one story left alive in the equity market is that the housing market is recovering faster than people thought. I think the housing market is bottoming … But I don’t think it’s about to have a robust recovery,” he said.

One of the big events for the stock market this year was  Facebook’s initial public offering Friday.

Some traders said stocks had an early bid Friday because of Facebook, but that faded. Facebook shares were barely changed on the day, ending 23 cents above the $38 offer price. However, trading in the stock was marred by communications problems at the Nasdaq and the stock had a rough start, reaching a high of $45 very briefly.

Trades were still being resolved late in the day and there is likely to be more discussion about that in the coming week.

Facebook, at $18 billion, is the largest tech IPO and it attracted a great deal of retail investor interest. In fact, retail investor participation in the market Friday was 50 to 70 percent higher than the average for May, according to Sandler O’Neill’s Richard Repetto.

“It’s rather ironic there’s been massive outflows from equity mutual funds, yet individual investors think they’ve found the investment. I think this thing is tremendously overhyped. It’s not half as important as everybody makes it out to be,” Bernstein said.

Another stock in the news is JPMorgan [JPM  33.49    -0.44  (-1.3%)   ], which lost 9 percent in the past week, after its admission the week earlier of a major trading loss. JPMorgan CEO Jamie Dimon faces investors at a Deutsche Bank conference Monday at 9:30 a.m.

What to Watch (All times Eastern)

Monday

Earnings: Campbell Soup, Lowe’s, Urban Outfitters, Ryanair

0515 am Atlanta Fed President Dennis Lockhart speaks in Tokyo on monetary policy

Tuesday

Earnings: AutoZone, Best Buy, Medtronic, Ralph Lauren, Vodafone, Williams-Sonoma, Cracker Barrel, DSW, Analog Devices, Dell, Petsmart, Guess, Take Two

0615 am Atlanta Fed’s Lockhart in Hong Kong on monetary policy

1000 am Existing home sales

1000 am Richmond Fed survey

0100 pm Treasury auctions $32 billion in 2-year notes

Wednesday

Earnings: Hewlett-Packard, American Eagle, Bank of Montreal, Big Lots, Hormel, Toll Brothers, NetApp, Pandora, PVH, Synopsys

1000 am New home sales

1000 am FHFA home price index

0100 pm Treasury auctions $32 billion in 5-year notes

0200 pm Minneapolis Fed President Narayana Kocherlakota in Rapid City, S.D.

Thursday

Earnings: Costco, Royal Bank of Canada, Tiffany, Toronto Dominion, Verifone

0830 am  Initial jobless claims

0830 am Durable goods

1230 pm New York Fed President William Dudley at Council on Foreign Relations

0100 pm Treasury auctions $29 billion in 7-year notes

Friday

0530 am Philadelphia Fed President Charles Plosser speaks in Germany

0955 am Consumer sentiment

Follow Patti Domm on Twitter: @pattidommQuestions?  Comments? Email us at marketinsider@cnbc.com

Welcome to the week of May 21st to the 25th. Below is the economic calendar listing the important events:

Market Focus » International Perspective » Simply Economics » Dennis Lockhart Speaks   Chicago Fed National Activity Index 8:30 AM ET 4-Week Bill Announcement 11:00 AM ET 3-Month Bill Auction 11:30 AM ET 6-Month Bill Auction 11:30 AM ET	Dennis Lockhart Speaks   ICSC-Goldman Store Sales 7:45 AM ET Redbook 8:55 AM ET Existing Home Sales 10:00 AM ET Richmond Fed Manufacturing Index 10:00 AM ET 4-Week Bill Auction 11:30 AM ET 2-Yr Note Auction 1:00 PM ET	Naryana Kocherlakota Speaks   MBA Purchase Applications 7:00 AM ET New Home Sales 10:00 AM ET FHFA House Price Index 10:00 AM ET EIA Petroleum Status Report 10:30 AM ET 5-Yr Note Auction 1:00 PM ET	Weekly Bill Settlement Durable Goods Orders 8:30 AM ET Jobless Claims 8:30 AM ET Bloomberg Consumer Comfort Index 9:45 AM ET EIA Natural Gas Report 10:30 AM ET Kansas City Fed Manufacturing Index 11:00 AM ET 3-Month Bill Announcement 11:00 AM ET 6-Month Bill Announcement 11:00 AM ET 52-Week Bill Announcement 11:00 AM ET 7-Yr Note Auction 1:00 PM ET Fed Balance Sheet 4:30 PM ET Money Supply 4:30 PM ET	Consumer Sentiment 9:55 AM ET SIFMA Rec. Early Close 2:00 ET
Equity Settlement 5-24-12	Equity Settlement 5-25-12	Equity Settlement 5-29-12	Equity Settlement 5-30-12	Equity Settlement 5-31-12

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ToS is down but I just got the following from the tech dept.

Our delivery and validation process has not yet completed for this release, despite being able to log into the software. We are working now to get all user data and settings re-associated in the platform. All should be ready to go well before futures and forex market open tomorrow afternoon.

Quote:

Originally Posted by BobK 

ToS is down but I just got the following from the tech dept.

 

Our delivery and validation process has not yet completed for this release, despite being able to log into the software. We are working now to get all user data and settings re-associated in the platform. All should be ready to go well before futures and forex market open tomorrow afternoon.

I just received the following at 11:15.

Hello,

We have completed the update and are testing the functionality. This will be resolved soon.
 

Quote:

Originally Posted by StockJock-e 

One possible bear scenario Im watching here, if this is a wave 3 down, which is feels like it is, then we could be getting a bounce soon before the next flush lower.

 

This depends on what happens in Greece this weekend, which is suddenly the most important thing in the markets after 4 months of everybody ignoring it.

 

I don't know what to think except just follow the trend. Why is Greece so important now after being ignored? Companies come out with good earnings and drop in price while the the poor reports will generate higher prices.

I really feel sorry for anyone trying to get into trading and starting out new. I first started swing trading about 30 yrs ago and never saw anything that would compare to today's markets.

Quote:

Originally Posted by barbellman 

Great chart SJE,

 

I'm looking for a bounce here at this point too.  Maybe some G8 news comes out and that becomes the catalyst that brings the EURO up and the dollar down.  If we do rally, does $FB become loved and retouch that $45 opening high?  In terms of risk/reward I wouldn't want to keep opening new short positions here a bounce would be great to reopen short again.  At minimum at small snap back rally to work some of this off..

 

Normally a big decline would set up Wall Street for a technical rebound. But I would not look for it next week, even after the market posted its worst weekly loss for the year. Take a look at last August. I'm glad I don't trade equities.

I just read the following:

What has changed in the world since April? We went from hearing a constant refrain that the world is awash in money and markets must go higher to hearing nobody wants to take any risk. ... All in a week," said Peter Cecchini, global head of institutional equity derivatives at Cantor Fitzgerald & Co in New York.

"Weighing on sentiment is a growing sense among investors that the euro zone debt crisis is nearing new heights, fueled by fears of the potential for a Greek euro exit and the deteriorating health of the Spanish banking system."

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