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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.
“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.
“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.
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)
Earnings: Campbell Soup, Lowe’s, Urban Outfitters, Ryanair
0515 am Atlanta Fed President Dennis Lockhart speaks in Tokyo on monetary policy
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
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.
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
0530 am Philadelphia Fed President Charles Plosser speaks in Germany
0955 am Consumer sentiment
Welcome to the week of May 21st to the 25th. Below is the economic calendar listing the important events:
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