Look Ahead: Currencies Could Sway Stocks in the Coming Week

U.S. markets in the coming week may be slower heading into the first official long weekend of summer, but fidgety currency markets could keep the focus on Europe and geopolitical concerns.

Traders are also watching a smattering of U.S. economic reports, especially durable goods orders, to see if the economy continues to show signs of stalling.

Nobody expects a repeat performance of the high-flying LinkedIn IPO, but there are a few initial offerings in the week ahead, including Russian internet company Yandex, already drawing good demand.

"I think the markets will continue to be focusing on what is or isn't happening in Greece. We don't think anything will materialize though," said Robert Sinche, head of global currency strategy at RBS.

"The capital goods orders (durable goods) are big in the U.S., because there is some concern about how the business sector is responding to the rise in commodities prices and energy prices," Sinche said.

The consumer sentiment number Friday also bears watching to see if consumers are reacting to the slight drop in gasoline prices. "If wages and salaries are growing, and price pressures are coming off, that would set the course for a better second half," said Sinche.

Weekend municipal elections in Spain are also a potential factor for the euro, which fell 1 percent Fridayto 1.4158. The euro was up slightly against the dollar on the week. The concern is if Spain's ruling Socialist party is a big loser, it would create uncertainty. There is also talk that the new government could find more debt than currently is declared.

"My sense is it's not about the dollar getting stronger. It's about the euro getting weaker. I think there's been a bit of erosion in sentiment in part because of the politics in Washington over the deficit," said Marc Chandler, chief currency strategist at Brown Brothers Harriman.

"On balance, most of the (U.S.) data suggest not much of a pickup in Q2 GDP, from the subdued Q1 level," said Chandler. First quarter GDP was reported at a soft 1.8 percent, and economists have been bringing down their forecasts for second quarter after a string of disappointing U.S. data.

Art Cashin, director of floor operations at UBS, said the stock market and other risk assets continue to track the euro, and that was especially clear Friday when the euro was highly volatile on a series of headlines about Greece.

"It looks like currencies have absolutely taken over. Anyone who doubts the relationship between the currencies and the market just take a look at a minute-by-minute chart between the euro and the S&P," he said. The focus now is on the elections in Spain Sunday, he said.

Whither Markets

Stocks ended lower after a choppy week, which took the Dow down 0.7 percent to 12,512 and the S&P 500 off 0.3 percent at 1333. Treasurys gained on the week, driving yields lower. The 10-year was yielding 3.154 percent, and the 2-year was yielding 0.52 percent, the lowest yield since Dec. 6. Oil was flat on the week, off $0.16 at $99.49 per barrel.

Metals gained, with gold up 1 percent at $1508.80 per ounce, but copper had an outsized gain, rising 3.6 percent to $4.119 per pound. "The commodity with the PhD in economics is copper, and it looks like copper's put in a nice little base. It's performing well, and it was the first commodity to weaken...it was the first one to signal a slowdown," said Sinche.

Stocks could continue to be choppy and trade sideways, according to Wells Fargo Advisers chief equities strategist Stuart Freeman. "The uncertainty level has risen a bit," he said.

Freeman said China's efforts to slow its economy, a string of soft U.S. data, the European sovereign situation, and the end of the Fed's quantitative easing program are all issues for the market. Another concern is the discussions in Congress about the U.S. debt ceiling, which would have to be increased by Aug. 2 to avoid default.

"Not unlike when Fed policy typically changes after the first move up in a bull market, you get into a sideways pattern of trading, and depending on what else happens exogenously, that could turn into a decline. We've got a range for the end of the year of 1250 to 1300. I'm still comfortable with that target for year-end. We had a lot of catalysts in the first half of the year—Fed spending, federal government spending, good earnings comparisons. The back half of the year, it just seems like some of the visibility of those things has gone down and we're kind of in a different place," he said.

"We still could take a run up here if we get some good numbers or if there's a benefit from oil coming down. Investors could make one more run to take the market higher. I think that's altogether possible in the short run. I just think there's a good chance that by the end of the year, we might lose that rally," he said

Freeman makes it clear he does not see a return to recession, but he has been long defensive utilities and telecom sectors. He is underweight technology and financials but likes materials and industrials.