Thursday Look Ahead: It's Euro Debt Threat, Gang of Six and Jobless Claims vs Earnings

European leaders could temporarily steal the spotlight from Washington lawmakers Thursday, as they meet in Brussels to discuss the Greek debt crisis and how to keep contagion from spreading.

Commodities traders at the New York Mercantile Exchange.
Photo: Oliver Quillia for CNBC.com
Commodities traders at the New York Mercantile Exchange.

Weekly jobless claims and a flood of earnings news could also be drivers for markets that were much less volatile Wednesday than earlier in the week. The Dow was down 15 points to 12,571, and the S&P 500 was down less than a point at 1325. The euro was at 1.4218, after trading in a much tighter range Wednesday against the dollar.

Morning earnings news is expected from AT&T, Morgan Stanley, PepsiCo, Blackstone, Nokia, Lilly, Nucor, Travelers, Diamond Offshore, Union Pacific, United Continental and Sherwin-Williams. Microsoft, AMD, Sandisk, Flextronics and International Game Technology report after the close. Earnings so far have been mostly positive for the market, with exceptional gains from IBM and Apple.

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Traders are also watching for signs of continued progress in Washington toward a vote to raise the debt ceiling and reduce the deficit. The debt ceiling will be reached Aug. 2 so Congress is under pressure to get a vote done by next week. Talks had come to an impasse, but markets reacted favorably Tuesday to a new bi-partisan offering from the so-called "Gang of Six" Senators.

The senators opened the door to the possibility of a plan that would allow for a debt ceiling vote, and then, in later legislation, Congress could make more substantial spending cuts and increase revenues. The White House Wednesday said President Obama would agree to a short-term deal to raise the debt ceiling if it was part of a larger agreement where Congress would soon after adopt a bigger deficit reduction package.

Stocks traded quietly on low volume Wednesday, after Tuesday's wild swing higher, and Monday's move lower. "They (traders) wanted to see if there was anything developing with the "Gang of Six" — and any problems," said Art Cashin, director of floor operations at UBS. "Second thoughts started to show up overnight, and now we're waiting on tomorrow's mini EU summit."

Jobless claims are expected at 8:30 a.m. ET and are estimated to be around 410,000, just above the 405,000 reported last week. The claims number has special import this week since it is the survey week for the July employment report, an important focus for markets after June's dismal report of just 18,000 non farm payrolls.

"...a 410,000 reading during the July employment survey week would be down sharply relative to the 429,000 level reported during the June employment survey week," wrote Deutsche Bank chief U.S. economist Joseph LaVorgna in a note Wednesday. "This would point to some incremental improvement in July nonfarm payrolls relative to the meager +18,000 increase seen in June."

The Philadelphia Fed survey is released at 10 a.m., as are June leading indicators and the FHFA home price index. Fed Chairman Ben Bernanke; Securities and Exchange Commission Chair Mary Schapiro; CFTC Chairman Gary Gensler and Acting FDIC Chair Martin Gruenberg are testifying at a hearing on the Dodd Frank bill, a year after the financial reform legislation was adopted.

European leaders, meanwhile, will be discussing ways to involve the private sector in the bailout of Greece. Among the ideas floated were a form of debt swap which would shave the value of Greek bonds but also conceivably be viewed as a default. Another idea was the creation of a new bank tax that could raise 50 billion euros for Greece. The proceeds could finance a buy back of Greek bonds by the euro zone's bailout fund, the European Financial Stability Facility, according to news reports.

French president Nicolas Sarkozy and German Chancellor Angela Merkel met ahead of the summit and were reported by Reuters to have reached an agreement on how the banking sector would participate in the bailout. No details of the agreement were available, Reuters said.

An agreement on the private sector role is needed to clear the way for a 71 billion euro rescue package from the euro zone countries and IMF.

"This is extremely difficult. You have two major players who are insisting on completely inconsistent outcomes. The Germans, who want the public sector involved and the ECB which does not want any sort of selective default. I'm not sure how you can reconcile these. I think that's the issue going into this. ..I can't see the ECB backing away from its position because it runs into risks for its balance sheet," said Robert Sinche, global head of foreign exchange strategy for RBS.

"Our European team thinks they just kind of cobble things together. Our bottom line is we don't think they'll come up with anything comprehensive here that makes markets believe they're out in front of the process. I think there'll be some patches," he said.

European markets were calmer as well on Wednesday, and peripheral sovereign debt markets continued to stabilize as investors sold safe-haven U.S. and German bonds. "It's going to be a difficult day, and there may be some cosmetics that it takes the markets awhile to figure out and get through. It's hard to believe we're not going to have another flare up in the not too distant future," Sinche said.

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