Business Blog Posts

With light trading volume expected next week due to the U.S. Thanksgiving holiday on Thursday, intraday swings are likely to be wide and frequent as traders instantly react to headlines out of Europe.

In addition, a 12-member "super committee" in Congress has until midnight on Wednesday to strike a deal involving tax increases and spending cuts to rein in federal spending. Investors are concerned that failure to reach a deal would result in automatic reductions that would harm the fragile recovery.

But with Wall Street poised for a technical rebound after finishing the worst week in two months, some say there are a lot of variables that could spark a rally.

If the super committee can come up with a workable deficit-reduction plan and if progress can be made in Europe, "the stage could be set for a fourth-quarter rally that might surprise even the most bullish traders," said Randy Frederick, managing director of trading and derivatives for Schwab in Austin, Texas.

"Of course, those are some mighty big 'ifs.'"

GERMAN BUNDS

European debt yields, an important risk barometer for investors these days, have shown exceptionally high correlation to equities. For the past several weeks, stocks have quickly reacted to moves in Italian, Spanish and French yields.

Now, there could be a new worry in German Bunds.

"We do have a new uncertainty that has gotten a bit of attention over the past few days and that is the selloff in the German Bund market. There has been heavy selling by Asian real money investors in Bunds the last few days," said Chuck Retzky, director of the futures division of Mizuho Securities USA in Chicago.

"The Bund market is considered to be one of the safe havens for investors' money in the world and if that should show a significant crack and the selling pressure continues, then people will worry if U.S. Treasuries will see a similar selloff in the future," he said.

On Friday, the Dow and S&P erased losses as the yield on Spanish 10-year bonds eased.

Spanish elections set for Sunday could help support a rise in the euro against the dollar in the very near term because the opposition party, which is seen as favoring austerity measures, is expected to win.

TECHNICALLY SPEAKING

The S&P 500 .SPX fell 3.8 percent on the week, ending its worst week in two months, but the index closed above its 50-day moving average near 1,200, showing signs of strength to move up higher.

"Our expectation is that the recent market selloff is not the beginning of a whole scale, multimonth downside collapse, but rather is likely the latter stages of a pause following a surge in October, and another upside rally attempt will develop shortly," said Robert Sluymer, analyst at RBC Capital Markets in New York.

"The overall technical set-up has not materially changed in the past few weeks."

For the week, the Dow Jones industrial average .DJI fell 2.9 percent and the Nasdaq .IXIC lost 4 percent.

Next week's economic data includes existing home sales for October on Monday and third-quarter preliminary GDP report on Tuesday. On Wednesday, durable goods orders, personal income and outlays and weekly jobless claims are due. The markets will be closed on Thursday for Thanksgiving.

(Reporting by Angela Moon; Additional reporting by Doris Frankel in Chicago; Editing by Kenneth Barry)

How financial markets will react if a committee created to slash $1.2 trillion in federal spending over 10 years fails to strike a deal is a tough call, partly because investors have been distracted by a Europe's more immediate debt crisis.

For one thing, market expectations could hardly be lower, especially with an election year looming and memories of the summer's ugly debate over raising the country's debt ceiling and the resulting loss of the nation's triple-A credit rating still fresh in investors' minds.

Also, any budget cuts wouldn't take effect until 2013 and failure would not trigger an immediate government shutdown or interrupt important services.

But a sharp, out-of-nowhere sell-off in U.S. markets on Thursday afternoon was blamed in part on vague rumors that talks to trim federal spending had stalled.

"This thing is incredibly difficult to handicap," said Jacob Oubina, senior U.S. economist at RBC Capital Markets. "But the last thing you want is to introduce another element of volatility into the markets, and that's exactly what these guys are going to do because they can't get their act together."

The biggest concern is not the cuts as such but the sense that Democrats and Republicans are simply unwilling or unable to compromise and make the tough decisions required to bring a deficit that's near 10 percent of gross domestic product under control.

"There are two diametrically opposed groups here, each against what the other side is trying to do, and both see benefit to failure because they can campaign on that," said Gregory Whiteley, who helps manage $19 billion at DoubleLine Capital in Los Angeles. "So expectations are pretty low."

Clashes between Democrats and Republicans over the right mix of spending cuts and tax hikes almost scuppered a deal to lift the debt ceiling in August, raising the threat of default and spurring Standard & Poor's to cut America's credit rating.

THREAT TO GROWTH

Some investors do fear that deadlock may imperil White House efforts to extend a temporary payroll tax cut and jobless benefits for the long-term unemployed, and that would be another negative for growth at a time when the economy can least afford it.

RBC economists said that if those measures, along with some investment tax credits, expire at the end of this year, it could shave 1.2 percent from U.S. growth in 2012.

That could roil U.S. stocks, which have been on a roller coaster ride since August and were on target Friday for their worst weekly showing in two months. .SPX

Stocks could lose 5 percent to 10 percent in the short run if anxiety about Washington policy gridlock really takes hold, said David D'Amico, president and chief strategist at Braver Capital in Boston.

"If they don't come out with anything and they force cuts and it becomes a political sideshow and the public and consumers become somewhat disgusted again with Washington, you could have a real sell-off in the marketplace," he said.

LOW EXPECTATIONS

While not expected, a deal to cut the full $1.2 trillion would probably provoke a relief rally in markets, investors said.

Marc Doss, regional chief investment officer at Wells Fargo Private Bank in San Diego, said that could be a green light for hedge funds and other money managers who are underinvested in stocks because of recent market turmoil to kick off a year-end rally.

"Expectations are low after the debt ceiling debacle, but if they get to $1.2 trillion, it would instill some confidence in the political process," he said.

Bond investors say deadlock probably won't hurt the bond market, either, since Europe's problems should sustain a safe-haven bid for Treasuries.

Jack McIntyre, who helps manage a global fixed income portfolio at Philadelphia-based Brandywine Global, said that's why he remains overweight the dollar relative to the euro even as he favors currencies from faster-growing emerging markets over the greenback.

The 10-year Treasury note was yielding 2.01 percent on Friday. Among major developed markets, that was above comparable yields only in Germany and Japan.

And if stocks do wobble, another round of monetary easing from the Federal Reserve, which has toyed with the idea of pumping more money into the system by doing additional purchases of mortgage-backed debt, could help support asset prices.

LONG RUN RISKS

In the long run, though, the parallels with Europe's most troubled countries becomes more striking and harder to ignore.

Harm Bandholz, chief U.S. economist at UniCredit said America is treading a path similar to the one that led Italy, Greece and others into trouble: borrowing money at low interest rates to boost short-term growth and swelling the debt burden.

As governments in Rome, Madrid and elsewhere found out in recent days when their borrowing costs spiked to euro-era highs, that can only go on for so long. "The U.S. is still running at full speed in the wrong direction," Bandholz said.

Additionally, about 71 percent of marketable U.S. debt will mature in the next five years, said Lawrence Goodman, president of the Center for Financial Stability in New York. That's well above the historical average and makes the country vulnerable to refinancing risk.

"Markets continue to give the U.S. a pass on its excessive deficit," he said. "But what's happening in Europe should be a powerful lesson, especially given our maturity profile."

(Additional reporting by Sam Forgione in New York and Stella Dawson in Washington. Editing by Martin Howell)

The Dow and S&P 500 were little changed and the Nasdaq composite index fell.

Friday's directionless market showed more exhaustion than relief as Europe remained investors' primary worry. Stocks found support after Italian and Spanish bond yields fell thanks to buying by the European Central Bank.

In the United States, doubts grew whether a bipartisan committee could come up with budget cuts and tax increases that Congress can agree on next week.

Financial shares, which have been among the most sensitive to euro zone financial strains, rose on Friday. The S&P financial index was up 0.5 percent. Morgan Stanley shares edged up 0.6 percent to $14.21 but fell more than 13 percent this week.

A major question has been whether the European Central Bank will find a way to act as a lender of last resort in the manner of the U.S. Federal Reserve. Speculation has grown the ECB could lend money to the International Monetary Fund to bail out some euro zone members.

"It's hard to see the ECB changing roles, but on the other hand the powers to be have to be very aware of the consequences if this gets out of control," said John Manley, chief equity strategist at Wells Fargo advantage funds in New York.

"I can't imagine it is allowed to go to a level that it causes serious harm to the marketplace."

The Dow Jones industrial average gained 25.43 points, or 0.22 percent, to 11,796.16. The S&P 500 dipped 0.48 point, or 0.04 percent, to 1,215.65. The Nasdaq Composite lost 15.49 points, or 0.60 percent, to 2,572.50.

For the week, the Dow fell 2.9 percent, the S&P dropped 3.8 percent and the Nasdaq lost 4 percent.

The S&P failed to rise above 1,225 after a drop below it on Thursday triggered massive selling, and it is now strengthening as technical resistance.

Little conviction characterized this week's market action as traders worried changes in governments in Greece and Italy failed to bring bond yields much lower.

Spain's likely new leader, center-rightist Mariano Rajoy, pleaded with financial markets for breathing room to start tackling the country's economic crisis if he wins power in a parliamentary election this weekend.

"If people don't see politicians standing behind change, markets are ready to force change," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

While investors try to come to grips with how much of an impact the European crisis may have on the U.S. economy, data for the United States showed continued improvement.

A gauge of future U.S. economic activity rose more than expected in October, according to the Conference Board.

About 6.7 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq on Friday, below the current daily average of 8 billion shares.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 13 to 10, while on the Nasdaq decliners beat advancers 1,259 to 1,226.

(Reporting by Rodrigo Campos; Editing by Kenneth Barry)

Selling on Thursday afternoon pushed the S&P 500 through a support level at around 1,230. The next key test will be whether the index can hold its 50-day moving average just above 1,200, possibly setting the stage for a bounce if it does.

"As risk assets begin to pull back or pause, many are quickly moving back to important trading support near 50-day moving averages," Robert Sluymer, a technical analyst at RBC Capital Markets in New York, said in a note. "This sets the stage for another rebound to develop in the coming few days or week."

S&P 500 futures were up 8.7 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures gained 71 points, and Nasdaq 100 futures rose 10.5 points.

Growing concerns about Europe's debt crisis have set U.S. stocks up for their worst week in two months.

Euro zone and International Monetary Fund officials have discussed the idea of the European Central Bank lending to the IMF so it has sufficient resources to bail out even the biggest euro zone sovereigns, Reuters reported.

European sovereign debt yields, an important risk barometer for investors, eased from recent highs while the euro firmed. The yield on the Spanish 10-year, a recent focus of investors' concerns, fell back to 6.4 percent after rising above 7 percent earlier in the session.

But global equities remained under pressure. European shares were off their lows but still down 0.2 percent, while Japan's Nikkei stock average closed down 1.2 percent to it lowest in more than a month.

The S&P 500 is down 3.8 percent this week. That would be its worst weekly run since late September.

In another crisis flashpoint, Greece's national unity government will submit a 2012 austerity budget to parliament on Friday, its first task in meeting the terms of an international bailout, but a rift widened between the coalition's main parties.

The crisis comes at a time when the U.S. economy is gaining steam as factories produce more cars and slowing inflation relieves pressure on spending power. That is putting the country on a stronger footing to resist an economic storm gathering over Europe.

The Conference Board releases its report on October leading economic indicators at 10:00 a.m. EST (1500 GMT). Economists forecast a 0.6 percent increase, compared with a 0.2 percent rise in September.

H J Heinz Co reported lower quarterly profit early Friday, but the company stood by its full-year forecast. The shares fell 0.7 percent to $52.44 in premarket trade.

Shares in Blue Coat Systems Inc were up nearly 21 percent to $20.45 premarket after the maker of Internet-monitoring gear reported results late Thursday. However, Salesforce.com Inc fell 5.3 percent to $119.40 after it posted a quarterly net loss.

(Editing by Jeffrey Benkoe)