European leaders gathering for an emergency meeting Wednesday in Cannes could get more attention than Fed Chairman Ben Bernanke, unless he has a surprise policy move up his sleeve.
European officials called the meeting after Greek Prime Minister George Papandreou took them by surprise with a decision to put the bailout plan to a public referendum. The move caused a stir in Europe, and sent financial markets reeling. European leaders quickly called a meeting, ahead of G-20 leaders meeting in Cannes Thursday and Friday. They will also meet with Papandreou Wednesday.
Bernanke, meanwhile, holds his quarterly news briefing at the end of the Fed's two-day meeting Wednesday. The Fed is first expected to release a statement at 12:30 p.m. It should give an update on the economy but it is not expected to reveal new policy moves, despite the fact that some Fed officials have publicly discussed the idea of more "quantitative easing." Bernanke meets the press at 2:15 p.m.
"There's nothing more for the Fed to say or do," said David Ader, chief Treasury strategist at CRT Capital. "We saw the beige book. We know what their view of the economy was, and the data has firmed up a little."
He noted that New York Fed President William Dudley recently said it is possible the Fed could do another round of quantitative easing , if needed. Because of Fed officials' public comments, there are some who see a chance the Fed could take action at this meeting.
"There's a cracked open door," Ader said. "They could expand to QE3 and do something with mortgages. But they've only just started 'operation twist.' Let that sink in before they start dealing with QE3." The 'twist' program involves the Fed's sale of short term Treasury securities, and the purchase of an equal amount of longer duration Treasurys, in an effort to bring down rates. But unlike QE2, which involved the purchase of $600 billion in Treasury securities through the end of June, it does not expand the Fed' balance sheet.
The market is now speculating that the Fed could spring a "QE3" and purchase mortgages instead of Treasurys to put pressure on mortgage rates. "There is a high risk of QE3 for next year. I think that the Fed is telling us that they're softening us up for that," Ader said.
Investors will also be watching for the Challenger report on layoffs at 7:30 a.m. and the ADP private sector employment report at 8:15 a.m. Housing vacancies are announced at 10 a.m.
Early morning earnings news is expected from Nissan, Clorox, MasterCard, Time Warner, Sony, AOL and Comcast, NBC's parent firm. Kraft Foods, Hartford Financial, News Corp, Whole Foods and Avis Budget Group report after the bell.
The euro fell 1.1 percent against the dollar Tuesday to 1.37. The idea of a Greek vote raised speculation Greece could ultimately defect from the euro zone if its citizens, unhappy with fiscal austerity, vote down the conditions of the bailout plan in January.
The markets reacted Tuesday to a wave of news headlines on the Greek drama, as traders attempted to figure out if the Greek government will even still be standing in the near future. Papandreou has a loose grip on a very slight majority in the Greek parliament and will be dependent on a vote of confidence from them on Friday.
"We've been whipsawed here with headlines... It's going to be a rumor mongers delight (Wednesday). The Fed is going to be there, but more importantly you're going to have the preliminary meeting, with everyone arriving in Cannes early. It's still Europe driving the bus," said Art Cashin, director of floor operations at UBS.
RBS global currency strategist Robert Sinche said the probability of a Greek referendum in January is low, noting the confidence vote Friday. Sinche said the Greek situation raises questions about the EU/IMF bailout funding and also about the funding of vehicles from the international community.
"The genie is out of the jar and it's going to be very hard to get it back in. This isn't one where he can turn around and say, 'I was only kidding' There are steps here. The first big step is that pre-meetings of the G-20," he said.
The meeting in Cannes includes Merkel, Sarkozy, IMF chief Christine LaGarde, and other EU and European Central Bank officials. The EU leaders had hoped to bring the plan they agreed on last week to G-20 this week.
Stocks were rattled for a second day by concerns about Europe. The Dow was down 297 points, or 2.5 percent to 11,657, and the S&P 500 fell 35 or 2.8 percent to 1,218. Standard and Poor's pointed out that the first trading day of the month was the worst first trading day of November since 1932.
The S&P 500 also fell 2.85 percent on the first day of October, but finished the month up 10.8 percent. The S&P is now down 5.2 percent in two days, erasing all of last week’s 3.8 percent gain, and almost half of its October gain.
"I was expecting a fourth quarter (market) recovery. Things had been going along how I had planned, and now this throws a wrench into it," said Randy Frederick, director of trading and derivatives at Charles Schwab. Frederick said the developments in Europe could change his view on the market, depending on how they unfold.
"There are so many moving pieces now that I think a lot of investors are stepping back," Sinche said. Traders were also watching Italy Tuesday, as it debt trades at record wide levels.
Miffed About MF?
The fallout from the collapse of MF Global will continue Wednesday, as the firm has come under scrutiny for co-mingling its clients funds with the firm's. An MF executive was reported to have told government officials that MF dipped into its clients funds when it came under financial pressure, and a lawyer for the firm said all of the funds are now accounted for.
The high profile failure is a major embarrassment for Jon Corzine, the former New Jersey governor and U.S. senator, who once headed Goldman Sachs. MF filed bankruptcy after failing to find a buyer.
The firm was also a primary dealer, which is a firm that acts as counterparty with the Fed to implement monetary policy.
Follow Patti Domm on Twitter: @pattidomm