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Investors Still Looking for QE3 as Europe Keeps Markets on Edge

With Europe’s latest crisis keeping markets on edge, investors are hoping to find clues as to what might tip the Fed towards more easing in Wednesday’s release of Fed meeting minutes.

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Even though the Fed has signaled it has no plans for new easing, investors will study the minutes of its April meeting when they are released at 2 p.m. for any hint of what would cause the Fed to embark on a third round of quantitative easing (QE3) .

Markets are also watching the latest developments from Europe, an increasing cause for concern now that Greece’s efforts to form a government have failed and its banks appear to be under stress. Late day reports that depositors had withdrawn 700 million euros from Greek banks sent stocks tumbling into the final hour of trading Tuesday.

The fear that a bank ‘run’ was underway fed concerns that Greece would leave the euro zone, and in the background, the fear that other nations might follow it.

But investors focused on Europe are also wondering if it’s getting to be a serious enough factor to ultimately push the Fed into a new easing mode. The developments in Greece have escalated since the Fed last met.

“I think the big issues is that we know they kind of backed away from QE3, and there had already been pretty strong evidence of that I think in the March minutes. It would be interesting to see if there’s any talk on what might lead them to do that. It’s clearly what the market is focused on. It’s a topic that just won’t go away,” said Stephen Stanley, chief economist at Pierpont Securities.

Stanley said while serious, he does not expect the situation in Greece to have much effect on the U.S. unless it leads to a tightening of financial conditions.

“I think it’s something to be watched and I don’t dismiss it, but I’ve got to believe that having so much time to prepare, I’d be surprised if this catches anybody by surprise,” said Stanley.

“I don’t see how there’s any other end of story other than that they leave the euro zone. It doesn’t seem as a society they are prepared to do what they need to do to stay in,” he added.

The Dow finished down 63 points at 12,632, and the S&P 500 slid 7 to 1,330, after breaking through the key 1,340 support in Monday’s selloff. The yield on the 10-year Treasury slipped to 1.76 percent, the lowest level since October, and just above the record low of 1.67 percent of last September.

“We’re back to a situation where not only is there no water in the hose, but we don’t know who the fireman is,” said John Briggs, senior Treasury strategist at RBS.

The euro fell to a four-month low, finishing at 1.2730.

“Peripheral debt never tightened” when stocks were rising earlier in the day, Briggs added. “The fact we continue to leak lower tells us there’s still position exposure… we haven’t had a cathartic cleansing. It’s all been drip, drip, drip. I can’t remember the last time when you looked at a euro chart that you had it stair step for days,” he said.

German Chancellor Angela Merkel met with France’s newly elected president Francois Hollande, and together they said they would like Greece to stay in the euro zone. Greece is now headed for a new election in June, after its political parties failed to form a coalition government. CNBC’s Silvia Wadhwa interviews Merkel Wednesday.

“The Europeans aren’t going to throw the Greeks out,” said Milton Ezrati, senior economist and market strategist at Lord Abbett. If the Greeks leave, it will be their choice. “This is not going to bring Europe down… I don’t think the European Central Bank will wait as long as they did (in the past) to intervene. If this falls apart, and there is no euro, there’s no need for a European Central Bank .”

U.S. stocks tried to rally Tuesday, after Monday’s steep losses. “I think people realize there’s value, and the U.S. economy seems to be plodding on so there’s a great desire to be in or at least there’s a great desire to see the good in this situation, but it’s difficult to square it when there’s so much uncertainty coming out of Europe,” he said.

Besides the Fed minutes, there are housing starts and building permits at 8:30 a.m., and industrial production and capacity utilization at 9:15 a.m.

“Those are two numbers where it looks like you got the weather payback in March so those numbers could be rather strong. I have industrial production up 0.6 after the flat number in March,” Stanley said.

St. Louis Fed President James Bullard, who has spoken against QE3, is speaking at 12:30 p.m. in Louisville, KY. And his topic is “Fed on Pause.” Bullard has said the Fed should only do QE3 if the economy deteriorates.

There are several major retailers reporting earnings Wednesday morning, including Target , Staples and Abercrombie and Fitch . Limited Brands reports after the closing bell. Investors will also be focused on the disappointing report from J.C. Penney , which reported a loss and saw a 20 percent decline in sales. J.C. Penney stock fell sharply after hours.

Deere also reports earnings Wednesday morning, and AIG holds its annual meeting at 11 a.m.

The countdown to Facebook’s IPO pricing Thursday afternoon continues. Facebook plans to increase the size of its IPO by 85 million shares, says someone familiar with the matter, a move that could value the offering at as much as $18.5 billion.

As the social media company heads to its offering, GM decided to stop advertising on Facebook after determining its ads there had little impact on consumers. A new AP-CNBC poll showed that 57 percent of the users polled never click on ads or other sponsored content on Facebook.

GM will also be in focus after Warren Buffett’s Berkshire Hathaway filed late Wednesday that it bought a 10 million stake in GM.

Follow Patti Domm on Twitter: @pattidomm

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

  • 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.

  • CNBC Personal Finance Correspondent

  • 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.

  • Senior Producer at CNBC's Breaking News Desk.