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Europe Hijacks Investor Focus—The Countdown Is On

Headlines from Europe will once more hijack investor focus in the coming week.

France's President Nicolas Sarkozy (L) welcomes German Chancellor Angela Merkel as she arrives for a meeting on debt crisis on August 16, 2011 at the Elysee presidential palace in Paris.
Philippe Wojazer | AFP | Getty Images
France's President Nicolas Sarkozy (L) welcomes German Chancellor Angela Merkel as she arrives for a meeting on debt crisis on August 16, 2011 at the Elysee presidential palace in Paris.

There are some major U.S. economic reports, and it's the biggest week of the quarterly earnings reporting season, with 193 companies, nearly 40 percent of the S&P 500 reporting. Third quarter GDP, home prices, and consumer sentiment and spending data top the economic calendar. Big oil — Exxon, Chevron and BP — are among the long list of companies reporting earnings, as are Amazon, Caterpillar, Boeing and Merck.

"There's a lot of news next week. There's earnings, and there's Europe. There's a bunch of economic data points. There's a lot to move the market one way or another next week, but at the end of the day, Europe is going to be the primary driver," said Dan Greenhaus, BTIG chief global strategist.

Stocks have been lifted by expectations that European officials will find a workable solution to the sovereign debt crisis, but hopes have repeatedly been tamped down as meetings have been delayed and key players remained apart on important elements. European leaders met Sunday, following talks Saturday between French President Nicolas Sarkozy and German Chancellor Angela Merkel. The talks progressed, and leaders said a decision would be made Wednesday.

The Sunday meeting was expected to be where an agreement would be reached on how to recapitalize European banks and use the 440 billion euro (US$610 billion) European Financial Stability Facility bailout fund , but on Thursday, officials pushed the day of decision to a hastily added summit on Wednesday.

"It's going to be an unrelaxing weekend, with one eye looking over the shoulder at what's going on overseas. We were hoping to get some resolution coming on the weekend. Now we have to wait until Wednesday, and we'll probably have to wait until G-20" meetings Nov. 3, said John Briggs, senior Treasury strategist at RBS. The plan has been expected to be completed in time for the G-20 leaders meeting in Cannes.

The Dow this past week rose 1.4 percentto 11,808, its fourth weekly gain and its longest weekly winning streak since January. The S&P 500, up 1.1 percent for the week to 1238, is now down 9.2 percent from its April high. Nasdaq was negative for the week, off 1.1 percent to 2637, pulled down by technology stocks. The S&P technology sector, the worst performing major S&P sector, fell 2.2 percent for the week, dragged down in part by the near 7 percent decline in Apple .

Euro Drama

The euro was up just 0.1 percent for the week, but it's underlying moves were dramatic as it rode the rollercoaster of Euro zone headlines. The market was moved daily, and sometimes hourly by the latest headlines spinning out of Europe, with reports quoting unnamed sources giving the latest developments or just latest rumors. The euro stood at 1.3896 at Friday's close.

"Let's just assume that we do have a proposed solution unveiled by next Wednesday. Given how pumped the market has been about this, this major red circle on the calendar, it's going to be scrutinized like there's no tomorrow. My fear is that when anything is scrutinized to that degree, there will be scope for disappointment and potentially driving the next leg lower in market confidence," said Michael Moran, currency strategist at Standard Chartered. "Nobody was expecting a silver bullet. We're not going to get a silver bullet."

Moran said it's possible the markets already had their relief rally on a European solution ahead of the actual plan. "They need a picture perfect game here to really give the market unequivocal answers to their problems. It's going to be very hard. I'm skeptical they're going to be able to do it," he said.

Moran said there are three main ingredients the markets are looking for, with the first being the expanded size of the EFSF. According to reports, it could be anywhere between 1 to 2-2.5 trillion euros, and he thinks somewhere in between would satisfy markets. The second issue is the funding for bank recapitalizations, which some reports put at 100 billion euros or less. "Germany is trying to push the number down, and France is trying to push the number up," he said.

Finally, he said the size of the "hair cut" on Greek bonds was reported to be 50 to 60 percent as of Friday, from the original 21 percent.

"Those are the three big numbers I think people are looking at, but ultimately how does he European growth picture look next year? If Europe falls into a recession, which I think there's a strong risk, then all the debt metrics, all the ratios the IMF and policy makers are looking at, look a little worse," he said.

Moran said he sees just slight upside for the euro to 1.3940/1.3950, an important technical level. He said he expects it to stop its rise there, but it is possible it could break though. "I still favor selling into this rally, but perhaps not before Wednesday," he said.

"If I was in their shoes, I would want to make sure this was locked down tight and delivered with military accuracy. From what I can tell, there are are way too many leaks for their liking in the last week, and it doesn't' look good that such a high profile event has to be delayed. If I was running the time table, I would make sure that everything — all the Ts are crossed and I's are dotted — before they really lay it out there for the market to digest," Moran said.

U.S. Focused

More than a few traders noted this past week that if the U.S. market was able to focus on decent earnings news and some improvement in U.S. economic reports, they'd feel better about the move higher in stocks. According to Thomson Reuters, 68 percent of the S&P companies reporting have come in above estimates. (Click here for the latest earnings news.)

"What you're dealing with now is the idea the U.S. is not in recession," said Greenhaus. The 20 percent stock-market declines to early October were pricing in concerns of a double-dip recession. "The data now is proving that that's just not accurate, and in that case, the stock market should be higher," he said. Greenhaus expects a rally toward 1300 for now but said over the next four to six quarters, stocks will likely lower.

This week's data should provide more clarity on consumers, who have been spending more than economists had expected. Consumer confidence is reported Tuesday, and consumer sentiment is Friday, as is personal income and spending data. Third-quarter GDP will also be important on Thursday. Even though it is backward looking, economists have been raising their forecasts to 2.5 percent and above, after knocking them below 2 percent based on the data early in the quarter.

J.P. Morgan chief U.S. equity strategist Thomas Lee said he is positive on the market now, as earnings have been good and the economy is finally accelerating. "I think closing above 1230(on the S&P 500 Friday) is significant. I think it is very constructive...That would put us pretty close to the early August highs...before the market really fell apart," he said. (The S&P finished at 1238 Friday)

Lee said he favors cyclicals into the year end, including consumer discretionary, tech and financials. "Financials recently reached a 30-year low on relative price to book basis. That's a pretty historic low valuation for a group. To me that tells me alot of the bad news is priced in. Even if financials are at the epicenter of this crisis, I think the downisde is priced in," he said. The financial sector rallied nearly 4 percent in the past week and are up 11 percent for the month-to-date.

Goldman Sachs strategists, in a note Friday, raise a red flag on earnings. They write that the operating earnings for the S&P are at a new high this quarter, but the median fourth-quarter guidance is 2 percent below the average consensus estimate. They note that Apple and Abbott Labs guided higher, but the majority of companies guided below estimates. They point out that net margins remain at peak levels and are tracking at 8.9 percent, unchanged from last quarter but they are expected to slip in 2012.

Financial companies, they note, contributed 88 percent of the upside surprise in earnings but they also say the financials' better numbers include one time items and are "best characterized as 'low quality.'" Financials had been expected to grow quarterly earnings by 6 percent, but they are now at 23 percent, the analysts said.

In the coming week, they note energy companies are reporting and their sales growth is expected to be 34 percent, contributing almost half the overall S&P 500 sales growth.

The Next Thing

The same Goldman Sachs strategists point out that investors are fixated with Europe, but few are focusing on the approaching Nov. 23 deadline for the Congressional Supercommittee to identify $1.2 trillion in budget cuts. "Progress appears to be slow and downside exists to US equities during the next month," they wrote.

What To Watch (All times are Eastern time)

Monday

Key earnings: Caterpillar, Kimberly-Clark, Eaton, VF Corp, Netflix, Amgen, Texas Instruments

Tuesday

Key earnings: Dupont, 3M, BP, Amazon, Delta Airlines, Deutsche Bank, UBS, UnderArmour, Xerox, Illinois Tool Works, UPS, U.S. Steel, Novartis, Peabody Energy, F5 Networks, Express Scripts, Quest Diagnostics, TD Ameritrade, Dreamworks

0900 a.m. S&P/Case-Shiller home prices

1000 a.m. Consumer confidence (Oct)

1000 a.m. FHFA home prices (Aug)

1000 a.m. Richmond Fed survey (Oct)

0100 p.m. $35 billion 2-year note auction

Wednesday

Some key earnings: Boeing, Allergan, American Electric Power, ConocoPhillips, JetBlue, GlaxoSmithKline, General Dynamics, Lockheed Martin, Medco Health, Northrop Grumman, Owens Corning, Sprint Nextel, WellPoint, Aflac, Norfolk Southern, Visa SAP

0830 a.m. Durable goods (Sept)

1000 a.m. new home sales (Sept)

0100 p.m. $35 billion 5-year note auction

Thursday

Some key earnings: Procter and Gamble, Exxon Mobil, AstraZeneca, Altria, Bristol-Myers, CMS Energy, Colgate-Palmolive, Barrick Gold, Raytheon, Royal Dutch Shell, Potash, Occidental Petroleum, Motorola Solutions, Royal Caribbean, Aetna, Motorola Mobility, NCR, Baidu, Advanced Micro, Banco Santander, Dow Chemical

0830 a.m. Weekly jobless claims

0830 a.m. GDP (3Q adv)

1000 a.m. Pending home sales (Aug)

1100 a.m. Kansas City Fed survey (Oct)

0100 p.m. $29 7-year notes auction

Friday

Some key earnings: Chevron, Merck, Aon, Biogen Idec, Constellation Energy, Rockwell Collins, Newmont Mining, Goodyear Tire, Interpublic, Whirlpool, Weyerhaeuser, Total, Femsa

0830 a.m. Personal income/spending (Sept)

0830 a.m. Employment cost index (3Q)

0955 a.m. Consumer sentiment (Oct final)

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  • Patti Domm

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

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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