U.S. stocks at whim of Greece, Fed
SAN FRANCISCO (MarketWatch) -- Investors, who recently have swapped their worst fears about Greece for optimism that global central banks could come to the rescue, are likely to remain at the whim of European events in the next week.
Sentiment could swing either way -- toward relief, for example, if Greek voters choose candidates seen more committed to keeping the cash-strapped country in the euro zone.
Perversely, stocks also have the chance to extend their recent rebound if Greek elections, U.S. economic data and European bond markets paint such a dark view of global finances that central banks announce a 2008-style crisis backstop.
"We're seeing some positive sentiment return on account of a few things: the prospect of coordinated intervention in the event of a sloppy Greek election, or outright victory of an antiausterity party," such as Syriza, said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. "There's a big relief rally because people have become overly pessimistic."
U.S. stocks on Friday ended higher for the second straight week, the first such streak in more than a month. The Dow Jones Industrial Average (DJIA) ended up 1.7%, helped by triple-digit point gains Thursday and Friday. The S&P 500 Index (SPX) rose 1.3% for the week. The Nasdaq Composite Index (COMP) lagged, ending 0.5% higher. Read more on Friday's stock action.
Beyond a surprise coordinated move, the Federal Reserve could separately announce a new round of extraordinary monetary stimulus, such as big purchases of bonds. After its Wednesday statement, Fed Chairman Ben Bernanke holds a press conference.
On Monday and Tuesday, leaders from the Group of 20 nations are meeting in Mexico; the Obama administration said Friday the meeting will focus on global recovery, with Europe the most important piece. Read G-20 preview.
There's the potential for investor hopes to get crushed next week, however, if international policy makers don't step in with a surprise liquidity move.
The status quo from central banks could weed out newly bullish investors. Even success from the Greek candidates perceived as most pro-European currency union could fail to provide much support to risk-taking investors if those results leave Greece and Europe in straits similar to those faced a few months ago -- cash-strapped Greece facing a deepening recession, unable to finance its debt and political leadership in disarray.
"Markets are rallying on faith that with the activity and action of central banks, that contagion could be kept at bay," according to Wasif Latif, vice president of equity investments at USAA Investments in San Antonio.
At the same time, "there is a significant probability that things unfold in a much more negative way because -- even if central banks are standing ready to help out in terms of liquidity -- if the party wins that doesn't want to be in the euro, or there's some reneging on promises, no one really knows what contagion or impact could be," he said.
Either way, volatility is likely to be the byword. "We are indeed in unknown territory, and because of that both sides of the argument will hold sway," Latif added.
In a sign of that uncertainty, the Chicago Board Options Exchange's Volatility Index (VIX) spent much of Friday's session higher, even as stocks rallied.
A few corporate reports could add, or at least distract, from investors' laser focus on Europe.
After the close Thursday,
The road from Athens
Corporate earnings, for the time being, are expected to take a back seat to European politics.
By the time Asian markets open Monday and U.S. stock-index futures start trading Sunday evening, traders are likely to know the results of Greece's national parliamentary election that day. Read how polarized Greece girds for crucial election.
The surprise success of the left-leaning Greek party, Syriza, in the May election and the subsequent failure of the leading parties to form a coalition government spooked global markets, as investors priced in a Greek departure from the euro zone.
But some of the pessimism has faded in the past week -- in the upside-down way markets sometime react -- as rising Italian and Spanish bond yields, plus slow-growth U.S. data have hiked expectations that the Fed and other central banks would rush out crisis-combatting measures.
Reuters reported central bankers are ready to take measure to maintain liquidity in global credit markets if needed after the Greek elections. Read more on report of possible coordination.
Also Thursday, U.K. Chancellor George Osborne said the Bank of England would activate an emergency-lending program, noting that "we are not powerless in the face of the euro-zone debt storm," according to reports. Read more on Osborne's comments.
Then on Friday, European Central Bank chief Mario Draghi said the ECB will continue to supply liquidity to solvent banks "where needed."
U.S. data illustrating the economic recovery hitting a wall also has contributed to expectations that the Fed separately, or along with other central banks, could act soon.
On Friday, an index of New York-area manufacturing for June showed the lowest reading since November, while industrial production for May slid. Even lower gasoline prices have failed to boost consumer sentiment.
In the week ahead, data releases include indicators on the housing market: an index of home builders from June, May housing starts and May existing home sales. The Philadelphia Federal Reserve's June survey of manufacturing is expected to improve from its negative reading last month, though not by much. See MarketWatch's economic calendar.
"The slow deterioration in the economic outlook should eventually get the Fed to jump back in and ease further," wrote Bank of America/Merrill Lynch economist Michael Hanson, in emailed commentary.
The question, he said, is "when and how." Hanson's team sees about a one-in-three chance the Fed will announce a strategy that would change its balance sheet, such as by buying bonds. He expects Fed comments to prepare the public for a third round of quantitative easing by Aug 1 or Sept. 13.
Miller Tabak's Wilkinson, on the other hand, forecasts the Fed could roll out a bond-purchase program of about $500 billion next week, and "anything less may simply disappoint markets."