Earnings Versus Europe

A rush of corporate earnings news should help steer stocks Thursday, but Europe’s sovereign debt crisis could come back into play, depending on the outcome of Spanish bond auctions.

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Spain

Wall Street traders have become fixated on Spain, which has seen sovereign yields rise in recent weeks on concerns the country’s lack of growth makes its high debt levels unsustainable. Spain is auctioning 2.5 billion euros in debt, including 10-year notes Thursday. The yield on its 10-year Wednesday was at 5.83 percent, and there’s concern a sloppy auction could send rates higher, hit the euro and equities markets.

The early focus Thursday may also be on France, which holds its own debt auctions. That is of particular interest, ahead of the first round of the French presidential election Sunday. Political rhetoric leading up to that vote has increasingly gotten the market’s attention.

On Wednesday, socialist challenger Francoise Hollande, leading contender against President Nicolas Sarkozy, said IMF projections on the French economy were unacceptable. He also said new measures to spur growth may be necessary, which immediately had traders speculating France could increase stimulus spending, if he wins.

“The key risk for the euro in the second quarter is economic growth and political uncertainty, and the French election is one of the key political events,” said Brown Brothers currency strategist Mark McCormick. “Just because Hollande wants to renegotiate the terms of the fiscal compact, a lot of it may be political rhetoric, but I wouldn’t rule out the possibility that he would try to dilute some of the things they put in there.”

McCormick said there is concern that victory by Hollande in the May election would damage the important alliance between France and Germany in addressing Europe’s sovereign issues. “The influence now for political support has been through the relationship between Sarkozy and (German Chancellor Angela) Merkel. I think you’re going to be hard pressed to see a relationship form between Hollande and Merkel,” he said.

The Dow slumped 82 points to 13,202 Wednesday, after its strong rally Tuesday. IBM , reacting to Tuesday’s disappointing earnings news, was responsible for 55 points of the decline. The S&P 500fell 5 to 1,385.

Bank of America, Nokia, Morgan Stanley, DuPont, Travelers, Verizon, Blackstone, Union Pacific, Peabody Energy, Freeport McMoran and EMC are among the companies reporting ahead of Thursday’s opening bell. Microsoft, Capital One, Advanced Micro and Chipotle Mexican Grill report after the close.

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“It’s all earnings, all the time, with a modest of awareness of what’s going on in Europe,” said Dan Greenhaus, global market strategist with BTIG.

“The macro data is secondary now, although there’s a modest focus on housing.”

Existing home sales are reported at 10 a.m. EDT, as is the Philadelphia Fed survey and leading indicators. Weekly jobless claims, released at 8:30 a.m., is especially important after last week’s miss, when claims rose to 380,000. “The trend has been higher so certainly you want to see that pare back some of that negativity for sure. We certainly have a momentary pause in the improvement in the labor market,” Greenhaus said.

Some of the companies reporting after Wednesday’s close will also get attention, including Qualcomm which fell sharply after the bell on its disappointing outlook, and Ebay and F5 Networks , which both rose on positive earnings news in late trading.

“We’ve had a terrific improvement in the economy that’s helped drive the stock market higher, and now you want to see corporations affirm the macro improvement with micro improvement,” Greenhaus said. “As the days go by, you want to see that play out… So far, the earnings season is a little better than the market expected.”

On Wednesday, “after you had a not well-received earnings report from IBM, and to a lesser extent to Intel , the market’s doing okay. Caterpillar was up, Exxon was up, Hewlett-Packard was up. There’s a powerful counterbalance which is why the market is not way down on those reports,” Greenhaus said.

Luggage maker Tumi will also be of interest Thursday, after pricing its initial public offering at $18 a share, a dollar above the range previously announced.

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