Unrest in Egypthas replaced Europe's debt crisis as a flash point for markets, and any unfolding developments there will no doubt affect trading in the week ahead.
Clashes between protesters and authorities intensified Friday, as the government deployed the Army against civilians in the street for the first time in 25 years. The anti-government uprising caught the attention of financial markets in the fourth day of protests Friday, triggering a jump in oil prices and rush to safe-haven assets, like gold, Treasurys and the dollar.
The Dow fell 1.4 percent Friday to 11,823, in the same week it reached 12,000 for the first time in nearly three years.
For the week, the Dow was down 0.4 percent, its first weekly loss in two months, and the S&P 500 was down 0.6 percent to 1276. The S&P fell 1.8 percent Friday, its worse decline since Aug. 11. The Nasdaq, down just 2 points for the week, fell an outsized 2.5 percent, or 68 points Friday, to 2686, as tech stocks took a major hit. Many traders and analysts had been expecting a pull back in stocks, and some said this could be the start of a several percent sell off.
"Geopolitical events tend to cause sharp reactions, then we forget about it for a few days."
"We don't know what's going to happen, so there's near-term headline risk," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. "Top-tier economic data next weekcould shift market attention away from the Middle East if things don't escalate too much."
The January employment report, due Friday, is one of those things that will get attention. Economists expect about 135,000 non-farm payrolls were added in January. ISM manufacturing data and auto sales on Tuesday will also be important. European finance ministers meet at the end of the week, and Fed Chairman Ben Bernanke speaks at the National Press Club and takes questions from the media on Thursday.
There are also dozens of major earnings reports in the coming week, including Exxon Mobil , Archer Daniels and Pfizer . "My bias is to think the equity market will find its footing next week," said Barry Knapp, head of U.S. equities portfolio strategy at Barclays Capital.
"Geopolitical events tend to cause sharp reactions, then we forget about it for a few days," unless the situation escalates, he said.
Egyptian President Hosni Mubarak, after the Wall Street close Friday, announced that he was still in charge of the government but that he was dismissing his cabinet. He said the rioting and plundering was unjustified and pledged to take new steps toward democracy and to help the unemployed and poor.
Oil traders had been watching the situation all week for signs of increased instability or spill over into other parts of the Middle East. Demonstrations have also taken place this week in Yemen and Jordan. Nymex crude rose $3.70 per barrel, or 4.3 percent Friday to $89.34 per barrel.
Egypt is not a major oil producer. It produces less than a tenth of the output of Saudi Arabia. But the fact Egypt controls the Suez Canal sent jitters through the markets as traders speculated an uprising could result in closing of the canal, a major shipping artery and a minor thoroughfare for oil.
Knapp did say an unexpected event, like the Egyptian uprising, could conceivably trigger a stock market pull back, but he thinks it would be no more than 5 percent. "I think anything deeper would be unlikely. I don't think it would lead to a 10 percent correction..If there rumblings in Saudi Arabia, it would be a different situation," he said.
Knapp said while fourth quarter GDP, reported Friday at 3.2 percent, had some very strong components, the fact that it did not meet expectations was a disappointment. Economists had forecast 3.5 percent.
"There was a lot to like in the GDP report. The fact of the matter is the headline did miss expectations again. When you think of when that happened in late April or late July, it did coincide with a pretty good equity market correction," he said.
Therefore, the week's economic reports will be very important and will need to support the idea of an improving U.S. economy. Besides the jobs report Friday, ISM manufacturing data and construction spending are released Tuesday. Monthly auto sales also are reported Tuesday.
The ADP private sector employment report is released Wednesday, and weekly jobless claims are Thursday. Productivity and costs, ISM non-manufacturing and factory orders are reported Thursday. Chain stores release their monthly sales Thursday.
'There's a big flow into save havens.'
The dollar has been buckling under a rising euro lately, but that pattern reversed Friday. The dollar gained nearly a percent against the euro, but it lost about the same against the yen, as the Middle East fears sent speculators into long yen positions.
"There's a big flow into the safe havens, that would be Japanese yen, Swiss franc and the U.S. dollar," said Chandler. He pointed out that emerging market currencies were particularly hard hit against the dollar Friday. The Turkish lire was down 2 percent and the Israeli shekel was down 1.3 percent. Mexico's peso was also down more than 1 percent.
"This is one of the times that the dollar got stronger and gold got stronger," he said. Gold, which was at its lows of the year this week, bounced 1.7 percent Friday, to $1340.70 per ounce.
Big oil is front and center this week, with Exxon reporting earnings Monday and BP on Tuesday. Illinois Toolworks, Gannett, Nustar, Checkpoint Software and Roper Industries report Monday. Anadarko reports after the bell Monday, as does Baidu.com .
Tuesday's major reports include Pfizer, UPS , Archer Daniels, Biogen, Cummins, McGraw-Hill and Paccar. Aflac, Electronic Arts, Broadcom and Electronic Arts report after Tuesday's close.
On Wednesday, Nadaq OMX, Time Warner , Mattel, Whirlpool, Marathon Oil, Allergen and Hershey report in the morning. News Corp, Visa, Yum Brands and Tesoro report after Wednesday's bell.
Merck , Glaxo, Blackstone, MasterCard, CME Group, Moody's, Diamond Offshore, N.Y. Times, Viacom, Cigna, Kellogg and Starwood release results Thursday before the bell. After the bell reports include Coinstar, Las Vegas Sands and Sunoco.
Aetna, Constellation Energy, Aon, Clorox, Tyson Foods, Weyerhaeuser, Pulte Homes, Fortune Brands and Simon Properties report after on Friday.
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