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Week Ahead: Thawing The Glacial Credit Freeze

Stocks will take their cue from credit markets in the week ahead and whether they are responding to international efforts to thaw the glacial credit freeze.

Traders at the NY Stock Exchange
AP
Traders at the NY Stock Exchange

After the past week's historic 18 percent market decline, shell-shocked investors will debate whether Friday's big 1,000 point Dow swing signaled a bottom for stocks. But frankly, while many traders say it feels like the market has capitulated, it's still too soon to tell and the health of credit markets will determine the fate of stocks.

"On a fundamental basis at some point, investors will start to investigate stocks versus the economy and on that basis, it's really going to set the stage for a big recovery in stocks. I don't think that is going to happen soon, until liquidity and credit markets are restored," said Thomas Lee, chief U.S. equities strategist at J.P. Morgan. "... A lot of people are looking for capitulation in stocks, but I think capitulation has to be concurrent with liquidity and credit."

Big for the markets in the week ahead are some key earnings reports from major financial institutions like Citigroup , J.P. Morgan , Merrill Lynch and Wells Fargo . Economic data includes inflation data, housing data and retail sales.

Investors will also be watching developments around Morgan Stanley , which saw a dramatic decline in its stock this past week ahead of its expected capital infusion from Mitsubishi UFJ on Tuesday. It was renegotiating its agreement with Mitsubishi over the weekend but was still expected to receive the capital.

The Dow lost 18 percent or 1,874 points to 8451 in the past week, its biggest decline ever. The S&P fell 200 points or 18 percent to 899. Stocks have not been at this level since April, 2003. The dollar this past week edged up 2.9 percent against the euro, finishing at $1.3413. Oil, meanwhile, tumbled, losing 17 percent to $77.70 per barrel.

When stock futures reopened Sunday evening, there were significant gains in the Dow, S&P 500 and Nasdaq. Oil was also moving higher.

Markets Mayhem

"Some good things are happening," said Mark Zandi of Moody's Economy.com. "The commercial paper market feels better. At least overnight Libor is starting to come in. I think if the Fed next week starts its CP program in earnest and really steps on the accelerator...I think that will have big impact. As soon as you get the tone in the markets firming that could have a ripple effect though the financial system. I'm hoping we see that next week."

Zandi said the Fed's enhanced ability to buy anything it wants from all types of institutions should help start moving the log jam in credit markets. "That's a big expansion of powers," he said.

"They are at a point where they need to let the things they put in place take hold. It seems unnerving otherwise," said Zandi.

Thawing the Globe

G-7 met Friday and issued a statement of cooperation, committing to use all tools to support systemically important financial institutions and to work together to unfreeze credit markets. Earlier in the week, major central banks cooperated in a coordinated interest rate reduction. The G-20 met Saturday in Washington and Eurozone leaders met Sunday in Paris.

European leaders agreed Sunday to temporarily guarantee bank refinancing as part of a raft of measures to ease the credit crises. The U.K., meanwhile, was working on providing a lifeline to several of its major banks.

The U.S. is working on its own plan to inject capital into banks in exchange for equity, a plan announced by Treasury Secretary Hank Paulson Friday. Traders expect more details from the government early in the week.

International finance officials met at the end of the week in which Britain was forced to carry out a major banking rescue operation and Iceland nationalized its banks.

In addition, US Treasury Secretary Henry Paulson announced that the government would pursue a plan to take equity positions in major banking institutions.

The meeting came at the end of the week in which Britain was forced to carry out a major banking rescue operation and Iceland nationalized its banks.

"You need the cooperation among the G7...because this is unprecedented. It affects a lot more countries and you need a lot more countries to be part of the solution. I think there are two remarkable things that happened this week. One was the coordinated cut that involved not just the G-7, and the second was bringing the G-20 into the process," said Robert Hormats, Vice Chairman of Goldman Sachs International.

G-20 includes the G-7 plus countries like India, Russia, China, Saudi Arabia and Brazil. "These are two significant changes in global financial management. They will have a bigger voice in the system," Hormats said.

Hormats said the global cooperation will be key to tackling the problems of the global banking system. "You have not seen a fracturing of the system," he said. "In fact, they are pulling together."

"They have an interest in the fact the U.S. is still the biggest economy in the global economy. They all have interest in working with the U.S. and helping to resolve this, and we have an interest in working with them. This is a serious issue and you're not seeing different countries going on their own, but they understand they've go to work together on this, and I think that's very compelling and a confidence building point," he said.

Some market participants said they thought the G-7 statement was light on detail, but Hormats said its the actions finance ministers take after they return home will matter most and he does expect action.

CNBC.com Pre-Markets

"The world is not falling apart. In fact, it is pulling together. I'm reassured by what I hear and see and I'm sure next week you'll see some more follow up from this."

Econorama

On Monday, the bond market is closed for Columbus Day but stocks will brave it out. The small business NFIB survey is released Tuesday. Inflation data is reported Tuesday and Wednesday when PPI and CPI are released, respectively. Retail sales are released Wednesday, as are business inventories, the Empire State survey, and the Fed's beige book. On Thursday weekly jobless claims are reported, as is industrial production, the Philadelphia Fed survey, and the National Association of Home Builders survey. Treasury also releases international capital flows that day. Housing starts are reported Friday, as is consumer sentiment.

Fed Chairman Ben Bernanke speaks Wednesday at midday in New York on the economy and financial markets. He takes questions after the 12:15 p.m. speech. Fed Vice Chairman Donald Kohn speaks that evening at 7 p.m. in New York.

Earnings Central

Major financial companies begin reporting earnings in the coming week with J.P. Morgan and Wells Fargo on Wednesday, and Citigroup, Merrill Lynch, Bank of New York , PNC , and BB&Treporting Thursday.

  • Plan Your Earnings Season
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  • Also reporting are Philips Electronics on Monday, and Johnson and Johnson , Pepsi , Intel and Genentech on Tuesday. Coca-Cola and eBay report Wednesday. Some big tech names - Google , AMD and IBM report Thursday. Continental Air , Harley-Davidson , Hershey and United Technologies also report that day. On Friday, Honeywell , Schlumberger and Gannett report.

    Questions? Comments? marketinsider@cnbc.com

    • Patti Domm

      Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

    • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

    • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

    • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

    • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

    • Senior Producer at CNBC's Breaking News Desk.