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Greek Debt Saga Back on Center Stage for Markets

Markets could be facing the choppiest week of the new year, as investors watch for a resolution in the Greek debt saga.

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Macduff Everton | Ironica | Getty Images

Stocks finished Friday with the biggest decline of 2012 and a spike in the VIX, volatility index, which was above 20 for the first time in nearly a month. The Dow was down 89 Friday at 12,801, and the S&P was off 9 points at 1342, south of a resistance zone at 1350, a level it failed to hold this past week.

“A lot depends on what happens over the weekend. I don’t think anything good is going to happen. I think the EU (finance ministers) was a little harsh with the Greeks. It looks like they were trying to push them out of the euro zone. It could get bumpy next week,” said Art Cashin, UBS director of floor operations.

Besides watching the latest scene in Greek’s debt drama, markets will be focused on U.S. economic reports. Retail sales and inflation data are expected, as are a series of Federal Reservespeakers, who may provide more clues as to Fed thinking on quantitative easing. There are still a few major earnings reports expected, from GM , Deere and Comcast , the parent of CNBC.

The Greek parliament on Monday approved a deeply unpopular austerity bill, against a backdrop of strikes and protests. Monday is also the deadline for Greece to conclude an agreement with private sector investors, who will take voluntary losses of as much as 70 percent on Greek debt. EU finance ministers meet to approve the Greek budget proposal Wednesday, which would clear the way for a $170 billion Greek bailout and allow it to avert default.

The Dow was down a half percent, or 61 points for the week, and the S&P 500 was down 2 points or 0.2 percent. The euro was up 0.3 percent for the week, but lost 0.7 percent Friday to 1.3199.

Commodities were also weaker at the end of the week, as the drop in the euro weighed on oil and gold. NYMEX crude ended the week, higher however at $98.67 per barrel, a gain of nearly 0.9 percent, as concerns about Iran’s impact on global oil supplies supported prices. Besides the Greek saga, euro zone GDP is expected Wednesday and it could have a negative reading.

“The best case scenario is for further consolidation next week when we see what Greece has achieved,” said Dolan. “...worst case is we have a larger risk off moment.”

Before Friday, stocks had been in a slow drift and analyst said the market needed a catalyst to push it, as Greek’s debt struggles seemed to have been put behind it. But Greece jumped back to the forefront Friday.

Markets are also watching for comments from Fed officials to see how close they are to considering another round of quantitative easing . Bernanke and other officials have said the Fed could ease if necessary, by purchasing mortgage securities to drive rates lower.

“If the Fed speakers next week move the needle away from QE3, I’m not sure how the markets would take that,” said Barry Knapp, head of equity portfolio strategy at Barclays. “ I’m personally of the mind that QE3 would be a bad thing for the equity market in the long haul.”

But he added that investors he speaks to who are in the bullish camp are bullish because of central bank intervention. “They are bullish because they believe that the European Central Bank stopped a run on the European banking sector,” he said.

The ECB LTRO program began in December, and that is when the stock market started rallying consistently though it is up more than 20 percent since October. If the European crisis is resolved, “the risk reward isn’t the greatest because we’ve had such a big move,” he said.

Traders are also watching each data point to see if the progress made in the January employment report and weekly jobless claims are real and sustainable. Data on inflationwill also become more important, since Fed officials have made it clear they would not ease if inflation was an issue.

“The other thing that’s big next week is we have some data coming in like retail sales and industrial production. Retail sales are expected to bounce back, after a weak December, but we’ll see,” said Knapp. December retail sales rose just 0.1 percent and January is expected to see a 0.8 percent rise.

On Monday, President Obama makes his budget request to Congress and is expected to forecast a deficit of $1.33 trillion in fiscal year 2012. The budget will put the U.S. fiscal debate back in front of the market, which is already beginning to worry that Congress will not be able to reach an agreement on the payroll tax holiday, which expires at the end of the month.

What Else to Watch

Monday

President Obama releases 2013 budget proposal

9:45 p.m. San Francisco Fed President John Williams on Fed mandate and monetary policy

Earnings: Diebold, Masco, Regal Entertainment

Tuesday

7:30 a.m. NFIB survey

8:30 a.m. Retail sales

8:30 a.m. Import prices

8:45 a.m. Philadelphia Fed President Charles Plosser on economic forecast

10:00 a.m. Business inventories

5:40 p.m. Atlanta Fed President Dennis Lockhart on economic outlook

Earnings: Avon Products, Fossil, Marsh and McLennan, Zipcar, Goodyear Tire, Borg Warner, TransCanada, Hospira, Zynga, FMC Technologies, Weight Watchers, Metlife

Wednesday

8:30 a.m. Empire State survey

9:00 a.m. TIC data

9:15 a.m. Industrial production

9:15 a.m. Dallas Fed President Richard Fisher on Fed operations and Texas economy

10:00 a.m. NAHB survey

2:00 p.m. FOMC Minutes

Earnings: Comcast, CBS, Deere, Dr. Pepper Snapple, ITT, Nvidia, Agilent, Owens Corning, Teva, Abercrombie and Fitch, Anglo Gold Ashanti, Dean Foods, Devon Energy

Thursday

8:30 a.m. Weekly jobless claims

8:30 a.m. PPI

8:30 a.m. Housing starts

09:00 a.m. Fed Chairman Ben Bernanke on future of community banking

10:00 a.m. Philadelphia Fed survey

Earnings: GM, Barrick Gold, Apache, Discovery Communications, JM Smucker, Progress Energy, Molson Coors, Hyatt Hotels, Huntsman, Duke Energy, PG&E, Applied Materials, Baidu, Leap Wireless, SunPower

Friday

8:30 a.m. CPI

10:00 a.m. Leading indicators

Earnings: Brookfield Asset Management, Campbell Soup, EnCana, Goldfields, Heinz, Amerigroup

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