Political change in Italy and Greece may help soothe markets and allow investors to assess whether the coming week's economic data signals better U.S. growth.
Some important economic reports, including retail sales and inflation, plus a potential cacophony of Fed speakers could draw attention away from Europe temporarily. Major retailers — Wal-Mart [WMT Loading... () ] and Home Depot [HD Loading... () ] — also help wind down the last week of the earnings season.
Bad news out of Europe reached a mid-week crescendo, as yields on Italian 10-year bonds temporarily shot above 7 percent and even France looked to be falling into the cross hairs as traders bet against its bonds. But the moves to replace the prime ministers of both Greece and Italy, plus seemingly aggressive buying of sovereign debt by the European Central Bank , helped calm markets.
The Dow in the past week, gained 1.4 percent to 12,153, and the S&P 500 was up 0.9 percent at 1263. For all its volatility, the euro finished the week down just 0.3 percent at 1.375. The U.S. 10-year finished the week, with a yield of 2.056 percent, slightly above the week earlier. Oil gained 5 percent for the week to $98.99 per barrel.
"You don't need inflows into U.S. equities for the market to go up. You just need a lack of bad news out of Europe," said Binky Chadha, chief U.S. equities strategist at Deutsche Bank.
The flow of improving economic data continued in the past week. with weekly jobless claims of 390,000 at a seven-month low on Thursday and consumer sentiment, reported at a five-month high on Friday.
Chadha said the market is positioned for negative news from Europe, and stocks could benefit if investor focus shifts. "Another way to think about equities is that where we are after all the noise from the sidelines, is that we're trading flat for the year ... Equities are very, very cheap. I think earnings are good. Corporates are the biggest buyers of equities. That's been the message of the third quarter," he said.
Corporations' new equity purchases for the third quarter total about $110 billion, or a $440 billion annualized pace, he said. "That's about 4 percent of the S&P (500) market cap, at an annual rate and so it's pretty significant," he said.
Super Committee Risk
Analysts say a risk for markets in the next two weeks will be the Congressional "super committee," tasked with finding a minimum of $1.2 trillion in deficit reductions over 10 years. While analysts think there's a good chance the bi-partisan committee will identify the cuts by its Nov. 23 deadline, there is also concern in the markets that it will not come to an agreement.
Some Washington insiders say it may be that the committee only finds some of the cuts. If that were to happen, an automatic "sequestration" occurs, which would generate automatic cuts across the board to total the balance of the $1.2 trillion. If no reductions are agreed, the sequestration would result in automatic cuts starting in 2013, with half the cuts coming from defense and the other half from other non defense programs.
There has also been concern that as the deadline approaches, the tone in Washington will once more become highly fractious, as it was in the summer during the debt ceiling debate.
"Our big concern is that heading into an election year, there doesn't seem to be a lot of push to cooperate right now," said Gary Thayer, chief macro strategist at Wells Fargo Advisors. Thayer said he sees more than a 50 percent chance the committee will find the $1.2 trillion in cuts.
But J.P. Morgan economist Michael Feroli, in a note, sees odds of the committee finding the full amount of cuts at just 30 percent, and a more likely scenario is that it only finds some reductions by Nov. 23. That would trigger a portion of the automatic cuts if it does not find the balance of the $1.2 trillion reductions by Jan. 15.
If the committee fails to find the full $1.2 trillion, analysts say the markets will not take it well. "I think there would be another shock, or after shock, but I think it would not be as bad as the summer," said Thayer.
Another risk analysts fear is the potential for another cut to the U.S. credit rating, if the committee fails. S&P cut the U.S. triple-A rating by one notch during the summer.
Economists are watching to see what the coming week will bring, particularly from Tuesday's October retail sales and the regional Fed surveys from Philadelphia and New York, relatively recent readings of activity.
But Europe may still drive the markets, as Greece works to qualify for its bailout and Italy names a new prime minister to replace Silvio Berlusconi. Economist Mario Monti was seen as the frontrunner to replace him, which appealed to markets.
"We'll probably be getting mixed news out of Europe for a couple of months. It's going to take a long time to fill in the details on these programs ... We'll probably have some days where things look to be going well, and then there will be the unexpected event that's viewed as a set back," said Thayer.
The rapid emergence of Italy as a trouble spot unnerved markets because of its size. Italy, the third largest debtor nation, has debt of $2.6 trillion and it is too large to be rescued by the European Financial Stability Facility .
But Chadha said Italy can work its way out of its problems. "Italy has a primary surplus. It is living within its current means. Its government expenditure is less than its government revenues. The problem is that the primary surplus has to be used to pay the interest on its past debt. Mathematically, for this to be stable, you need economic growth," he said. Some economists see Europe heading towards recession.
"Italy is a classic case of basically, confidence. It's self-fulfilling. You need something that's going to break that cycle," he said, noting the technocratic governments should help. Greece replaced Prime Minister George Papandreou with Lucas Papademos, a former European Central Bank official. "They are not career politicians. They have a different agenda," he said. "It's a very positive development."
Earnings: J.C. Penney, Lowe's, Urban Outfitters
Earnings: Home Depot, Wal-mart, Beazer Homes, Burberry, Covidien, Staples, TJX Cos, Dell, Agilent, Autodesk
0830 a.m. Retail sales
0830 a.m. PPI
0830 a.m. Empire State survey
1000 a.m. Business inventories
0800 a.m. Chicago Fed President Charles Evans speaks in New York on Fed's dual mandate
0830 a.m. St. Louis Fed President James Bullard speaks in St. Louis on economic outlook and monetary policy
0930 a.m. San Francisco Fed President John Williams speaks in Scottsdale, Ariz. on the outlook
1230 p.m. Dallas Fed President Richard Fisher speaks in New York on "too big to fail"
0100 p.m. Minneapolis Fed President Narayana Kocherlakota speaks at an economic outlook seminar in Sioux Falls, S.D.
Earnings: Abercrombie and Fitch, Target, Tyco, Applied Materials, Limited Brands, NetApp, Petsmart, Youku.com
0830 a.m. CPI
0900 a.m. TIC data
0915 a.m. Industrial production
1000 a.m. NAHB survey
1115 a.m. Richmond Fed President Jeffery Lacker on Fed policy panel in Washington
1245 p.m. Boston Fed President Eric Rosengren at Boston Economic Club
Earnings: Ahold, Dollar Tree, GameStop, Helmerich and Payne, Ross Stores, Sears holdings, J.M. Smucker, Foot Locker, Gap, Intuit, Marvell Tech, Salesforce.com
0830 a.m. Initial jobless claims
0830 a.m. Housing starts
0830 a.m. Building permits
1000 a.m. Philadelphia Fed survey
0100 p.m. 10-year TIPS auction
0430 p.m. Fed balance sheet
0430 p.m. Money supply
1230 p.m. Cleveland Fed President Sandra Pianalto speaks on the economic outlook in Lexington, Ky.
1250 p.m. New York Fed President William Dudley speaks at West Point on economic outlook and policy
1000 a.m. Leading indicators
0815 a.m. New York Fed President William Dudley in Albany on national economic outlook
0115 p.m. Dallas Fed President Richard Fisher on Fed functions and Texas economy in Dallas
0150 p.m. San Francisco Fed President John Williams on recovering from crises, in Santiago, Chile
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