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Wednesday Look Ahead: Political Paralysis Negative for Markets

Tuesday, 26 Jul 2011 | 8:13 PM ET

Washington's political paralysis around critical debt and budgetary issues will most certainly weigh on financial markets Wednesday.

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Stocks fell Tuesday, bond prices rose and the dollar was sold off around the worldas investors began to put greater odds on the idea rating agencies would take away the AAA U.S. credit rating.

The partisan debt feud also became a disagreement between Republican leadership and GOP House members, who opposed House Speaker John Boehner's debt plan for not cutting spending deeply enough. By late Wednesday, GOP leaders were meeting to discuss revising the proposed plan after it was scored by the Congressional Budget Office.

"I don't think anyone really doubts that the federal government is not going to be honoring its debt six months from now. The (stock) market's focused on it, but no one's really trading on it, but there's other stuff going on. There's a lot of running from risk here, and people are concerned the economy is slowing down," said Steve Massocca of Wedbush. "At the end of the day, anyway you look at it, the government's going to be spending less. Monetary stimulus is kind of over with and the economy's not doing that well."

Massocca said there's an odd divide in investor attitudes, seemingly more pronounced than usual. "You've got this weird market where you have one guy running for cover, saying 'I want the 10-year. I want the 5-year. I don't care! And it's almost like 2008,' and then on the other hand you have LinkedIn , up $1.66 today," he said, referring to high-flying growth valuation plays.

There were a few bright spots Wednesday, like Amazon.com's better-than-expected after the bell earnings, which drove that stock sharply higher in late trading. Electronic Arts also rose on earnings, but Juniper Networks fell more than 15 percent in late trading, after it reported a drop in profits and blamed mixed signals in the economy. It also provided a disappointing outlook.

The Dow was off 91, or 0.7 percent to 12,501 and the S&P 500 slipped 5 to 1,331. Nasdaq was down just 2 at 2,838, as Apple and chip stocks rose against a broader market decline.

Massocca said while earnings are beating estimates at roughly a three-to-one pace, he thinks the stocks are only reacting positively about half the time, in part because of company comments.

Joel Levington, managing director of corporate credit at Brookfield Asset Management, said the investment grade corporate debt market typically reacts favorably to earnings, but the market has not in recent sessions. "I think there's a knock on effect, where you've had a weak couple of days in the stock market and that has an impact," he said.

"I think even in investment grade you're not seeing a lot of the tightening in what I would say has been a pretty robust earnings season," said Levington.

Sentiment is also being impacted by deficit discussions in Washington. Congress has until Aug. 2 to raise the debt ceiling to head off a default, but as part of the vote on the debt ceiling, it is attempting to structure a deficit reduction plan. Rating agencies have warned they could downgrade the U.S. debt rating if there is not a serious effort to reign in the deficit.

Executives of Standard and Poor's and Moody's are expected to testify Wednesday at 10 a.m. before the House Financial services committee on regulatory reform and the ratings agencies post Dodd-Frank, as well as on the role the agencies play in the U.S. debt ceiling discussions.

Should the U.S. credit rating be downgraded, analysts have differing views on the impact but many agree it would send interest rates higher, and potentially spark more selling in equities and the dollar.

"Should there be a downgrade, I don't really think it's going to have that dramatic an effect on the corporate (debt) front," Levington said. He said the AAA ratings of several U.S. companies would be cut along with the sovereign. Those include Johnson and Johnson , Microsoft and Exxon Mobil .

What to Watch

There are several important economic reports Wednesday, including durable goods, at 8:30 a.m. ET and the Fed's beige book on the economy, released at 2 p.m.

Earnings are expected from Boeing, ConocoPhillips, Delta, Moody's, Northrop Grumman, Nissan, Dow Chemical, Aetna, Corning, Autonation, Tupperware, Legg Mason and WellPoint. Dr. Pepper Snapple, Diebold, Nasdaq OMX and Murphy Oil also report Wednesday morning.

After the bell reports are expected from Aflac, Akamai, Cabot Oil, Whole Foods, Visa, United Health, and Green Mountain Coffee.

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AET
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FORW RE LS
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DGIX
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PROF SOILGAS I
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COG
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COP
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DAL
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DBD
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DOW
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DPS
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VFNLFX
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GMCR
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LM
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MCO
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MUR
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NDAQ
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NOC
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TUP
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UNH
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V
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WFM
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WLP
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Dunkin Brands, parent of Dunkin' Donuts and Baskin Robbins, was expected to begin trading Wednesday.

Questions? Comments? Email us at marketinsider@cnbc.com

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AMZN
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JNJ
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JNPR
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MSFT
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GE
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VZ
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AAPL
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XOM
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  • Patti Domm

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

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