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Market Insider: Thursday Look Ahead

Published: Wednesday, 24 Jun 2009 | 7:40 PM ET

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By: Patti Domm
Executive Editor

Stocks are now searching for the next catalyst, after a routine Fed announcement left the market mixed and little changed on the day.

On Thursday's calendar, there are weekly jobless claims at 8:30 a.m. and a final look at first quarter GDP, also at 8:30 a.m. Traders though are already looking ahead to next Thursday's employment report and are expecting the upcoming second quarter earnings season to provide some direction. The end of the quarter on Tuesday is also expected to stir some activity across markets.

Investors will also keep close watch on a House Oversight Committee hearing where Fed Chairman Ben Bernanke testifies on his role in the Bank of America, Merrill Lynch merger. Rep. Darrell Issa, R-Calif. in a statement released Wednesday alleged the Fed "engaged in a cover-up," deliberately hiding concerns about the merger from other regulators.

Earnings news may also create some interest early Thursday. Jefferies stock jumped nearly 12 percent late Wednesday after it preannounced second quarter profits of $50 million, nearly double Wall Street estimates. Revenues are also expected to be more than $500 million, compared to expectations of just $341.2 million.

Nike was another story though. Hit by the consumer pull back, Nike [NKE Loading... () ] profits dropped on costs related to job cuts. Its net was down 30 percent to $341.4 million for the quarter ended May 31. Nike said orders for the June through November period are down 12 percent.

Markets Mayhem

Stocks scored triple digit gains early Wednesday on better-than-expected durable goods orders. But as the Fed statement approached, the market moved lower and stayed in a tight band. Once the news was released at 2:15 p.m., the market moved even lower, bonds sold off, pushing yields higher and the dollar firmed.

The Fed did not change its quantitative easing program as some traders had expected, nor did it change the language on when it would end its policy of keeping rates at extreme lows. It did remove the prospect of deflation as a concern, and said inflation will remain subdued despite the rise in energy and commodities prices. It also reiterated its view that the economic contraction is slowing and that economic activity will be weak for some time.

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"There were no surprises," said Peter Costa of Empire Executions from the floor of the NYSE.

Stocks finished mixed, with the Dow down 23 at 8299; the S&P 500 up 5 at 900, and the Nasdaq up 27 at 1792.

"The market will regroup, reformulate and start all over tomorrow. It's more a bond market-related move right now," said Costa, just after the Fed news. The 10-year's yield was at 3.687 percent and traded up to 3.7 percent late in the day.

Costa said the market is vulnerable to the downside, but he does not believe it will see a sharp sell off. "I think you'll see 870 to 880 (on the S&P 500) but I don't think you'll see 860," he said.

The Treasury market was volatile Wednesday. Bonds were steady afterthe Treasury's auction of $37 billion in five-year notes, but was hit by a selling wave after the Fed announcement.

"Whenever you go into a meeting, there's always the hope something dramatic is going to happen. When you got no change whatsoever in terms of what they are going to buy and no formal commitment for the Fed to keep rates low for a specific period of time, people were disappointed," said Rick Klingman, managing director of Treasury trading at BNP Paribas.

The Treasury auctions another $27 billion in notes Thursday, this time 7-years. "I think the curve could probably steepen a little bit between now and tomorrow," said Klingman. "Based on what we've seen in auctions in the last two days, I don't think it's going to be too bad."

In those auctions of 2- and 5-year notes, traders said there was strong participation, including from foreign central banks. The week's total issuance of $104 billion is a record.

Bernanke in the Hot Seat

The Fed chairman could face some tough questions when he discusses his role in the rushed merger between Bank of America and the seriously weakened Merrill Lynch late last year. Bernanke previously testified before the Joint Economic Committee that he did not ask Bank of America CEO Ken Lewis to obscure disclosures or fail to report information that should be reported.

The Fed faces an unprecedented level of scuritiny and has provided emails and other documents to the committee. Issa's claim, released in the early afternoon, did not impact the markets Wednesday, but traders believe if Bernanke faces real fire works or is tarnished, investors could get spooked.

"It's possible he's (Issa) got something, but I don't think he has any smoking gun," said Greg Valliere, chief political strategist at Soleil Securities. "I think people will be very interested to see what he's got because Bernanke's got a lot of detractors. I wouldn't say enemies, but detractors.

There are people in Washington who believe Fed policies led to the economic crisis. I think the guy is a great hero. Like most people in our industry, I think he's been phenomenal. I do think he'll be reappointed."

From Fast Money

Your First Move For Thursday June 25th

The Fed, in response to Issa's comments, released a letter that Bernanke sent to Rep. Dennis Kucinich on April 30 in which he said the Fed acted with the highest integrity in its discussions with Bank of America.

The chairman of the oversight committee, Rep. Edolphus Towns, D-NY, later said he would not prejudge the issues and that the committee is not even close to finishing its investigation.

"I think Bernanke will handle this very well. I think there's a little bit of smoke, but no fire," said Valliere, a CNBC contributor.

"I think the evidence would have to be pretty overwhelming for Bernanke's halo to slip. I think that President Obama would get a virtually unanimous opinion from the investment world that Bernanke should be reappointed," he said.

Valliere said there's an outside chance the inquiry could even bring to a head the question of whether Bernanke would be reappointed in January when his term expires. So far, President Obama has been supportive and even praised Bernanke but has not tipped his hand about whether he would reappoint the Fed chairman.

"Let's say the hearing is inconclusive, but somewhat embarrassing to the Fed. Then I think it may become necessary for Obama to voice support for Bernanke sooner rather than later," said Valliere.

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"If somehow Bernake became tainted, which I strongly doubt, then they would have to pick someone from within the Fed. Someone like a (Fed Vice Chairman) Don Kohn. Anyone like a Larry Summers would unnerve the markets because the markets would conclude monetary policy has become politicized," he said.

Summers, who serves as National Economic Council director, is believed to want the Fed chairmanship.

What Else to Watch

There's a hearing in the GM bankruptcy case Thursday that could provide some insight into General Motors' finances and its efforts to exit bankruptcy. Yahoo [YHOO Loading... () ] holds its shareholders meeting in Santa Clara, Cal. at 1 p.m. ET.

The House Financial Services Committee holds a hearing on affordable housing, and the House Budget Committee holds a 10 a.m. hearing on "pay go." OMB director Peter Orszag testifies.