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Europe May Send Markets on a Roller Coaster Ride

European policy and politics will call the shots for markets in the week ahead, as the euro zone grapples with Spain’s banking crisis and the Greek election gets closer.

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The U.S. will turn out a lot of economic news, but it will likely be overshadowed by developments from across the Atlantic, as euro zone finance ministers and leaders were to work on the weekend on finding a way to support Spain’s wobbly banks.

China over the weekend was also expected to report a series of economic data, including industrial production and retail sales, anticipated to be soft, given the People’s Bank of China‘s surprise rate cut Thursday.

“This week could be a roller coaster ride,” said Art Hogan of Lazard Capital Partners. Hazardous would be if there is no clear sign that a bailout for Spain’s banks is progressing, even if there is no formal deal reached. The Spanish government has said it is waiting to see an independent report on what funds its banks need before it makes a request. Meanwhile, the Greek election looms June 17, and that could help decide its fate in the euro zone.

“It cannot be perceived that they are just sitting around. They have to be engaging the market, even if it seems incremental. At least they’re tackling it and they’re rolling out a set of solutions and Spain is definitely front and center,” said George Goncalves, Treasury strategist at Nomuras Americas.

Stocks finished the past week with the best weekly performance of the year, amid high volatility. The Dow was up 3.6 percent for the week, to 12,554, and the S&P 500 gained 3.7 percent to 1325. All major S&P sectors finished higher, led by financials, which gained 4.7 percent. Energy stocks were up 3.9 percent for the week, after oil rose 1 percent for the week to $84.10 per barrel, its first weekly gain in six.

“What they (Europe) need to do is something shock and awe-esque. You could get a pretty health rally on that front. I am of the opinion to lean on U.S. stocks, stay with high quality names and dividends will help,” said Mark Luschini, chief investment strategist at Janney Montgomery.

Market sentiment improved in the past week after news reports pointed to the potential for a bailout for Spain’s banks by euro zone members that would not require harsh new fiscal measures for the country.

“The Spanish one matters a lot more. The trickier one is not knowing how to handicap Greece. Spain seems a bit more obvious. There is the question of whether the banks get bailed out or not,” said Luschini.

In Greece, the New Democracy party has been running close in polls to the leftist party, which opposes the country’s bailout and would reject austerity measures. Since Greece failed to form a government after its May election, markets have become anxious that it will exit the euro zone in a sloppy fashion, spreading contagion across Europe and the international banking system.

Some of that anxiety faded in the past week. The Treasury market reversed course, with rates rising off of historic lows, set the week earlier when it was the beneficiary of a flight to quality. The 10-year yieldwas at 1.64 percent Friday, up from 1.46 percent the previous Friday. There are $66 billion in Treasury auctions in the week ahead, including 10-year notes and 30-year bonds.

“The bond market had a pretty big snap back … I’m happy to see it because I didn’t think we should be that low in the first place,” said Goncalves. “We have the auctions. I think the 30-year is going to be under continued pressure.”

Goncalves said if Treasurys continue to cheapen ahead of the auctions, demand could be good for the 10-year notes Wednesday and 30-year Thursday.

“The auctions will be your last opportunity if you really are worried about putting on a big trade in size,” he said.

Euro Drama Weakens Economy

The coming week’s events could also be critical for stemming the drain of confidence that has accompanied the latest relapse of Europe’s debt crisis. Economists have been shaving their outlooks for U.S. growth and increasingly they point to Europe as a source of concern and uncertainty that is affecting the psyche of business leaders and their willingness to spend and hire.

“They’re not going to start cutting hundreds of thousands of jobs like they would in a recession, but they’re just going to slow down. We’re left with this mixed economy where consumers and the housing market seem to be moving along at a moderate pace, while the corporate side seems to be slowing and government spending continues to decline,” said Dean Maki, chief U.S. economist at Barclays. “So this looks like an environment of 2 to 2.5 percent growth.”

Maki Friday trimmed his outlook for third- and fourth-quarter GDP to 2 percent and 2.5 percent respectively, from 3 percent in each quarter. Other economists also have been reducing numbers for 2012 growth.

Deutsche Bank chief U.S. economist Joseph LaVorgna also trimmed his view of 2012 GDP growth, lowering the second half to 2.4 percent from 2.8 percent. He shaved the current quarter to 2.4 percent from 2.9 percent.

LaVorgna said Europe seems be to blame this time around, while last year’s soft patch was due to a combination of Europe and the business disruption that resulted from Japan’s earthquake and tsunamis.

“I think this time around it very well could be Europe," LaVorgna said, citing weakness in payrolls that has emerged faster this time than in last year's soft patch. "I do think Europe has been a factor that kept U.S. companies from making further expansion plans, in terms of the amount of people they’re hiring and the amount of equipment they’re buying,” he said.

For the U.S. in the coming week, the most important reports would be retail sales and weekly jobless claims.

“Europe will remain the trump card to any us economic data. I’m afraid I haven’t seen so much that you can see a cause and effect (from Europe) but you can hear it in corporate management , and I worry that unless it’s cured, it’s going to become much more apparent,” said Luschini.

“I think so far we’ve remained remarkably decoupled from it (Europe), but I can’t help but think it’s going to bleed into the consciousness,” he said.

What Else to Watch

Apple holds its developers conferenceMonday, where it is likely to unveil iPhone enhancements.

JPMorgan will also be in the spotlight as CEO Jamie Dimon appears before the Senate banking committee Wednesday to discuss the bank’s derivatives trading losses.

Also on Wednesday, OPEC holds its first meeting of the year in Vienna.

Since it last met in December, oil pricesare sharply lower as producers have increased production, particularly Saudi Arabia which is committed to keeping spare supply on the market as Western nation proceed with embargoes on Iranian oil. The global slowdown has also meant less demand. Brent crude, the international benchmark, has lost 7.4 percent this year so far, and was trading at $99.47 per barrel.

What to Watch Next Week (All times are ET):

Monday

1200 pm Atlanta Fed President Dennis Lockhart on economy

1200 pm San Francisco Fed President John Williams on Asian banking

0600 pm Cleveland Fed President Sandra Pianalto on education

0815 pm Chicago Fed President Charles Evans at Loop Capital Markets Economic Update Dinner

Tuesday

0730 am NFIB small business survey

0830 am Import prices

1130 am Fed Gov. Daniel Tarullo on shadow banking

0100 pm $32 billion 3-year note auction

0200 pm Monthly budget

Wednesday

0700 am Mortgage applications

0830 am PPI

0830 am Retail sales

1000 am Business inventories

0100 pm $21 billion 10-year note auction

Thursday

0830 am Jobless claims

0830 am Current account

0830 am CPI

0100 pm $13 billion 30-year bond auction

Friday

0830 am Empire State survey

0900 am TIC data

0915 am Industrial production

0955 am Consumer sentiment

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's Senior 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.