Look for the markets to be spooked between now and Halloween.
Fear returned to Wall Street this past week, and the Fed's meeting Oct. 31 is now being looked at as a necessary balm for the markets. Rightly or wrongly, that's how traders see it and they now expect the Fed to cut its target Fed funds rate and probably discount rate by a quarter point at that meeting.
Two market forces should stay in place as the new week begins - the double whammy of a weakening dollar and rising oil prices. In the week ahead, earnings news will be a big factor as will housing news.
Existing home sales are reported Wednesday and new home sales are released Thursday. The stubborn deterioration in the housing market - and all related industries- will continue for some time, as we heard in comments from both Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke in the past week.
The breakdown of confidence that started in credit markets mid-week spread to the stock market Friday, taking the Dow down 366 points, or 2.6%. The Dow is down 4.1% for the week to 13,522. That puts the Dow 642 points below its record close, but still up 8.5% for the year.
Nasdaq had a better week and was an engine for the market as some good tech earnings rolled in earlier in the week. But it was slammed Friday with a 74 point or 2.6% drop. Nasdaq was down 2.9% for the week but it is up 13% for the year so far. The S&P 500 lost 61 points or 3.9% for the week. Year to date, the S&P is up 5.8%.
Some traders I speak to regularly took the sell off Friday in stride. They blamed the fears about credit and some poor earnings news from companies like Caterpillar. Legendary investor Julian Robertson also told CNBC's Erin Burnett Friday that we are in for a "doozy of a recession." All that created a bad brew for stocks, but traders still saw money willing to come into stocks during the worst of the selling. But they all also see volatility continuing.
"People should stay invested," says CNBC's Larry Kudlow. "The market's going to hang in there and roll through this....People are too pessimistic about the housing market."
After the past week's mixed results, investors will be watching carefully to see if companies are giving a glimpse at the fourth quarter's performance when they release third quarter numbers. On Monday, drug companies Schering-Plough and Merck report before the bell.
Later in the day, American Express , a big bellwether for consumer credit, reports. Tech darling Apple and chip maker Texas Instruments report after the bell that day.
On Tuesday, AT&T, DuPont, Lockheed Martin and Burlington Northern report. We also get numbers from UAL, TD Ameritrade, New York Times , Amazon.com and Whirlpool that day, a really good mix of names from all parts of the economy.
Wednesday is another big day with Merrill Lynch reporting in the morning. Rumors have swirled that Merrill has deeper credit issues than its already reported, but the firm denies that rumor. Boeing also reports Wednesday as does Anheuser-Busch, Conoco Phillips, Amgen and Glaxo SmithKline. Thursday will see reports from Bristol-Myers, Ericsson, Ford and Motorola. Microsoft reports after the bell that day. Countrywide Financial reports on Friday.
Good news from tech companies battled to balance out the bad news from banks in the past week, so I asked CNBC's Silicon Valley Bureau Chief Jim Goldman what he expects when Apple and Microsoft report.
He said Microsoft's report is expected to be good, showing strength from Halo and Vista upgrades. But Apple could be stellar.
"There's almost an -- you don't want to call it this - irrational exuberance but it's getting close when you talk about Apple," he said. "There's a huge amount of optimism that the company will report its first two million unit sales quarter for the Mac."
Goldman says there's a whisper number for Mac sales of 2.2 million. "If they hit the whisper number that represents a sequential 500,000 unit sequential growth. That would be the largest that Apple has ever experienced. The biggest has been 350,000," he said.
Another event in the tech world this coming week will be Google's analyst day on Wednesday.
Oil rocketed this past week, blowing through record after record as the dollar shrunk. Oil jumped $4.91 per barrel this week, or 5.87% to $88.60. But it touched a high just above $90 a barrel in late trading Thursday. (Check Commodities Here).
John Kilduff, senior vice president of MF Global, says the same story will be in place next week and Monday could be a very volatile day when the November crude oil futures contract expires.
"The dollar continues to weaken, which is inflationary for all commodities but especially oil. We have geopolitical concerns stretching from Turkey to Nigeria to Pakistan that all play into crude oil's place as an event risk investment," he said. "Crude oil inventories have plunged since July.
Supply remains tight and we also have the added feature of central governments around the world commenting on their concerns about winter fuel supplies. That is also adding to the bullish sentiment in energy."
"We're expecting yet another up week for energy," said Kilduff, a CNBC contributor. "For Monday, the potential exists for some outsized volatility and likely a repeat of the surge we saw in the expiration of the October futures contract, when it got close to $84."
As expected, the G-7 did not take on the dollar's fall in its communiqué, but Paulson in comments Friday night told reporters that he supports a strong dollar that is determined by economic fundamentals and markets.
Guess the dollar must be reflecting economic fundamentals as it falls day after day against the euro. It lost 0.8 percent this week to a level of $1.4297 per euro. For the year, it has declined 7.7 percent against the euro and 3.7 percent against the yen.
"The markets believe the U.S. is going to slow more than Europe. If that's the case, if our Fed eases and the European Central Bank stands pat, it's dollar unfriendly," says CNBC's Rick Santelli.
The weak dollar, as expected, padded more than a few earnings reports as global companies reported last week. "The only bright spot for stocks is multinationals making foreign exchange profits. As much a positive as this is, I just think the credit issues loom larger..credit issues and what they will do to corporate balance sheets," said Santelli.
The credit markets story certainly loomed large this week. A flight-to-quality was apparent in all areas of the Treasury market as Wall Street once more began to fear the potential for new bomb shells in the troubled areas of the credit markets. In part, the worry came from disappointing results and gloomy forecasts from the banking industry, plus the realization that problems in the short term commercial paper market have not gone away.
The yield on the two-year reached 3.808% Friday afternoon, its lowest yield since September, 2005. The 10-year yield was 4.401%, its lowest yield since Sept. 11.
With the dramatic move in the credit markets came a big move in the Fed funds futures, pointing to a belief by traders that there's now a 94% chance the Fed will cut rates Oct. 31. On Tuesday, that percent was just 24%.
Other data due this week includes durable goods on Thursday and consumer sentiment on Friday.
Some important speakers this week include the Fed's Kroszner on financial markets Monday evening; the Fed's Evans on the economic outlook Monday morning; ECB President Trichet in New York Monday evening, and the Fed's Mishkin on financial instability in New York Wednesday afternoon.
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