The weakening euro could continue to strong-arm markets in the week ahead, as investors worry about contagion from Europe's sovereign debt crisis and the potential for a bigger setback in the U.S. economic recovery.
Stocks Friday suffered their second largest decline of the year from the double whammy of fresh worries about Hungary and a disappointing U.S. employment report, which showed little in the way of private sector job creation. But it was a sharp decline in the euro that really took stocks on a ride downhill, as the market followed each dip. The euro closed the week at $1.1966, its lowest level since March, 2006.
In the coming week, the U.S. market would normally have focused on Fed Chairman Ben Bernanke's testimony before a House committee Wednesday, as well as monthly retail sales Friday and other economic reports, but the focus will likely be on news from abroad. Over the weekend, G-20 finance ministers meet in Korea. Then early in the week, euro zone finance ministers meet in Luxembourg Monday and Tuesday. Separately, Hungary is expected to release a new budget after the EU turned down the government's request to run a higher deficit.
"I think the combination of the European problems, and the disappointing U.S. jobs data forces people to the side lines and makes people question how strong a recovery we are getting," said Marc Chandler, Brown Brothers Harriman chief currency strategist.
The problems in Hungary bubbled to the surface Thursday after an official of the newly elected government said the country's fiscal condition was worse than expected and likened its situation to Greece. The comment jarred already nervous markets, sending spreads on Europe's weakest sovereigns sharply wider.
The Dow lost 204 points, or 2 percent for its fifth weekly loss in six weeks. At 9931, the Dow is now 11.4 percent from its late April high. The S&P 500 lost 2.3 percent for the week, to 1064, its lowest close since Feb. 8. The Nasdaq in the past week lost 1.7 percent to 2219, and the Russell 2000 was off 4.2 percent at 633.
Traders have been watching the S&P 500 which moved well below its 200-day moving average in the low 1100 zone.
"You're still above the 1050 level which was the recent low, and if you break through that I think you're in new territory and you've re-established a strong downtrend," said Karl Mills, president of money manager Jurika, Mills and Keifer.
"Technical support levels matter until they don't matter. We blew through some of them very easily. There's always some level to watch. I think what's really going to drive it is the fundamentals in Europe, so what you're watching is credit spreads, Libor, interbank lending and the flow of credit," he said.
Mills said he has been positioned defensively, holding a large amount of cash and is sticking to highly liquid global companies with innovative products or important services. One of those companies is Apple, and he said he is looking forward to its developers meeting Monday.
May's employment report, released Friday morning, showed the creation of 431,000 non farm payrolls, but the bulk of those were were temporary workers hired for the government census and only 41,000 private sector jobs were created.
Economists had expected a number closer to 530,000, with 190,000 private sector workers. "The silver lining in an otherwise dismal report is that the work week increased and incomes increased...second quarter GDP is probably going to be unaffected by today's report," Chandler said. "It's a slower than average recovery, but it's still a recovery."
Richard Bernstein of Richard Bernstein Capital Management said he is not as much as worried about Europe as about the domestic jobs picture. The indicator he watches the most is the weekly jobless claims, which have stalled out in the mid 400,000 range.
"I still think that U.S. assets are perhaps the most attractive in the world, but it's going to take more global volatility for the consensus to come my way," he wrote in a quick note after the jobs report Friday. "USD appreciating. That more than anything else supports my longer-term bullish view."
Bernstein, in an earlier interview, said that the jobs picture needs to improve, but that Europe could actually help stimulate the U.S. economy. "We'll get lower gasoline prices, higher dollar which increases purchasing power and lower interest rates," he said.
"People are just not patient enough, and they want everything to happen rapidly, and these things don't happen that rapidly. I think job creation will continue. I think the economy will continue to progress, and the odds of a double dip are lower than people think," he said.
Barclays Capital chief U.S. economist Dean Maki said monthly jobs reports are volatile, and it's better to look at a three-month trend. "Over the last three months, we created an average of 139,000 private sector jobs," he said. He added that there could be some substitution factor at work, as workers took temporary better paying census jobs rather than take some lower paying private sector jobs, and that could reverse as the census workers are let go during the summer.
Maki also does not think the European sovereign concerns at this point are hurting the U.S. economy. That would change, however, if the stock market decline gets more severe and dampens consumer spending.
In the coming week, he is focused on Bernanke's testimony and retail sales, which he expects to rise 0.4 percent. Bernanke testifies before the House Budget committee. "It's hard to see him dramatically changing his view. He likely will be asked about Europe and will probably address it briefly in his prepared remarks. I would expect him to continue to sound reasonably upbeat on the economic outlook but sight headwinds as a reason to be cautious," said Maki.
What Else to Watch
The U.S. Treasury auctions $70 billion in 3-year and 10-year notes and 30-year bonds Tuesday, Wednesday and Thursday.
Other U.S. data expected this week includes wholesale trade Wednesday and international trade Thursday. The beige book is released Wednesday and weekly jobless claims are reported Thursday.
Later in the week, the European Central Bank holds a rates meeting and news briefing. There is also fresh data from China on its trade balance Thursday, and retail sales, industrial production and CPI Friday.
"In addition to Bernanke, that's likely to be the next major pulse taking of the global recovery," said Brian Dolan of GFT Forex.
The frustration surrounding BP's inability to stop its spewing oil continues to grow, and traders increasingly mention it as a problem darkening the mood of investors. "I just think if it got turned off, the market would act better," said one trader.
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