Europe, Fed-watching to dominate next week

[WallyWeaver]

Europe, Fed-watching to dominate next week

Pessimism boosts anticipated release of the next round of ‘QE3’

June 2, 2012, 12:01 a.m. EDT

By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch) — Developments out of Europe and Federal Reserve-watching will be the main investor preoccupations in the coming week, as anxiety deepens over the euro-zone and U.S. economies.

“We remain hostage to news that is exported from Europe,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

On Monday, German Chancellor Angela Merkel is scheduled to meet with European Commission President Jose Manuel Barroso in Berlin in advance of a Brussels meeting of European leaders in late June.

Also, investors will be alert to any updates on Greece’s commitment to remaining in the euro zone. Recent polls indicate Greek voters want to have their financial bailout package terms revised favorably and stay in the euro zone too. Greeks will vote in a second parliamentary election June 17 after an earlier election in May failed to produce a coalition government.

The past week capped off a lousy May where investors took the old adage to heart, sold and went away. Over the month, the Dow Jones Industrial Average dropped 6.2%, the S&P 500 Index fell 6.3% and the Nasdaq Composite Index shed 7.2%.

On Friday, stocks extended those losses into the new month, swooning more than 2%. As investors fled to perceived safety assets, the yield on the 10-year Treasury note fell to a record low of under 1.5%.

Developments in Spain sent jitters through international markets in the past week as that country’s officials seek to stitch together a plan to recapitalize nationalized bank Bankia SA. Also, the head of the Bank of Spain said he would step down a month early.

Those events, along with a downgrade of the country by Egan-Jones Ratings Co., sent Spanish 10-year bond yields sharply higher to 6.5%. Then, on Friday, the same firm downgraded Italy’s sovereign rating to B+ from BB.

You want some QE3 with that lousy jobs report?

The latest headlines to jolt stocks came from the U.S. after the Labor Department said the economy in May created the fewest number of jobs in a year, and that the unemployment rate ticked up to 8.2%.

With that release, hurdles have been lowered for the Fed to start considering some sort quantitative easing measure, Luschini said.

Recently, Boston Federal Reserve President Eric Rosengren indicated that weakening economic data over the past few months supports the case for further easing on monetary policy.

While he doesn’t expect anything more than an acknowledgment of shaky economic indicators from Fed speakers next week, Luschini called Friday’s rally in bonds, cratering in stocks and gold’s bounce more of a “canary in a coal mine for QE3.”

Gold on Friday jumped $57.90, or 3.7%, to settle at $1,622.10 an ounce, after declining by about 6% in May.

With a light schedule of economic indicators in the coming week, Thursday will likely be a big day with weekly jobless numbers and Fed Chairman Ben Bernanke testifying before Congress, said Frank Fantozzi, president and senior adviser at Planned Financial Services.

Bernanke, who is speaking before the Joint Economic Committee on economic outlook and monetary policy, may even hint at getting involved in QE3 given the recent souring in economic indicators, according to Fantozzi.

“The thing we’re digesting now is what happened with the jobs report. It’s not showing that a recovery is taking,” Fantozzi said. “With the last three months trending away there’s a high probability that QE3 will be on the table to discuss.”

Before Bernanke speaks, Fed Governor Daniel Tarullo on Wednesday is testifying before the Senate Banking Committee on the Dodd-Frank Act. Fed Vice Chair Janet Yellen will be delivering a speech on economic outlook and monetary policy to the Boston Economic Club Wednesday evening.

Additionally, the Fed will release its regional economic report, the so-called Beige Book, on Wednesday.

Other coming economic indicators include April factory orders on Monday, the Institute for Supply Management’s May services index on Tuesday, first-quarter productivity and labor cost figures on Wednesday, and April trade deficit and wholesale inventories data on Friday.

With the bulk of earnings season over, a few S&P 500 companies will report first-quarter earnings in the coming week. On Wednesday, Brown-Forman Corp. and Pall Corp. will report earnings, with J.M. Smucker Co. reporting Thursday.

Also McDonald’s Corp. is slated to report May sales.

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