Choppy trading is likely to be the norm throughout the summer as markets face a minefield of uncertainties in the third quarter.
In the coming week, usually a quiet period around the fourth of July holiday, there is a series of events that could be key for markets, and with the beach beckoning, some traders may stay close to their desks.
Foremost, the jobs report for June is released Friday, and it is expected to again show tepid employment growth.
But it is being watched closely since jobs are considered a major trigger for further Fed easing. There is also a slew of other data, such as ISM manufacturing data and auto and chain store sales, which could reveal much about the current state of the consumer.
The European Central Bankholds a much-anticipated rates meeting Thursday, and some traders expect it to cut interest rates.
The ECB meeting follows a surprisingly eventful European leaders summit which resulted in a plan to forge a central banking authority and to authorize the euro-zone rescue fund to directly aid banks. There had been very low expectations for the meeting, and the results fired up a major risk rally Friday in stocks, commodities and the euro.
Financial markets are closed Wednesday for the holiday, and participants in the grain market are particularly upset because they will not be able to trade from Tuesday afternoon until Thursday morning.
In the past week, grains rose, with December corn futures jumping 15 percent on concerns that hot weather will hurt the young crop’s development. Any sudden forecast change, therefore, could be a major market event.
“When we’re in a weather market, any minute that you’re closed heightens the anxiety,” said Shawn McCambridge, analyst with Jefferies Bache.
Stocks closed out the second quarter with a bang, erasing about half the quarter’s Dow losses in one trading day Friday. The Dow was up 2.2 percent Friday at 12,880, and up 1.9 percent for the week. It was down 2.5 percent for the quarter.
The S&P 500 surged 2.5 percent Friday, and was up 2 percent for the week, ending at 1362. It was down 3.3 percent for the quarter, and is up 8.3 percent for the year. The Nasdaq was up 3 percent Friday, and gained 1.5 percent for the week to 2935. It was down 5 percent for the quarter, but up 12.7 percent for the year.
Treasury yields rose, but the reaction in the bond market was less exuberant, and many traders looked at the risk rally as quarter-end short-covering. The 10-year Treasury finished the week with a yield of 1.64 percent. “If we had taken the European summit, and the risk on trade seriously, we would have been well beyond 1.65. This is just a few basis points from the lows,” said CRT Capital chief Treasury strategist David Ader.
“We’ve been through nearly two dozen European summits that have promised a lot and always failed or kicked the can down the road. I don’t think this is any different. They still have to deal with austerity. They still have to deal with recession,” Ader said.
Stephen Stanley, chief economist at Pierpont Securities, also expects the reaction to the European leaders actions to be short-lived. “They put out another one of their brush fires. It stems the possibility of a crisis for the short-term. The larger problems, the bigger structural issues are not being addressed. There’s some movement in the right direction, but it’s just so slow,” he said.
On the U.S. data front, Stanley said he expects to see 110,000 nonfarm payrolls were added in June, slightly above consensus. “Unfortunately, I don’t think we’re going to break out in any big way,” he said.
He said restaurants may show employment declines and construction may have picked up with better housing data. “My sense is that it feels like the goods sectors are doing a little better and the service sector is slowing down,” he said.
Stanley expects to see the ISM manufacturing and nonmanufacturing surveys to remain above 50, still showing growth. “What we’re seeing broadly in the economy is cooling but not contraction,” Stanley said.
The more elevated level of weekly jobless claims in recent weeks reflects the same thing. “I think it’s just indicative of the idea that the economy has lost momentum. A lot of businesses are sitting on their hands right now, waiting to see how things play out,” he said. “There are any number of wild cards.”
Strategists for the most part, expect the third quarter to be volatile but a possible turning point for the stock market, which could move higher into the end of the year.
“I think the summer will be choppy. There’s less liquidity in the summer,” said Tobias Levkovich, chief equity strategist at Citigroup. But he expects it will set the market up for a move higher, once it becomes clear which presidential candidate looks set to win the November election. His year-end target is 1425 for the S&P.
“It will be news driven. We’re going to be looking at every new poll that comes out in September,” he said.
Levkovich said the uncertainties for markets continue to include Europe; Iran and its nuclear program; slower Chinese growth; the U.S. ’fiscal cliff,’ and the presidential election, itself. Levkovich said much of the concerns are already priced in.
“I’m actually feeling relatively okay about the market at this point. That makes me feel a little weird because people don’t agree,” he said. Investor sentiment is very weak. “You’re supposed to be emboldened when people are fearful.”
While the economy is a concern, Levkovich said the widely watched Citigroup economic surprise index appears to be heading toward an inflection point where it could be signaling a turn. It has been registering a series of disappointing data misses.
Ed Keon, managing director at Prudential Financial’s Quantitative Management Associates, said he sees plenty of risks that could bother the stock market in the third quarter, including the slower economy and financial risk from Europe. Keon said he is currently positioned very cautiously and is holding more cash than usual.
“I do think the market will end the year higher,” he said.
Keon said he believes the bigger driver for the market is economic and fundamental, rather than policy or politics. “When you look at the jobs picture, the employment situation in the United States, it has softened, but on the other hand, you can argue housing has bottomed and that’s not as big a drag,” he said. “Autos and housing look like they’ve gone from being a drag to supporters of the economy.”
What to Watch
1000 am ISM manufacturing
1000 am Construction spending
0100 pm San Francisco Fed President John Williams on a panel on monetary policy
Monthly auto sales
1000 am Factory orders
0100 pm Stock market closes early for holiday
Independence Day holiday
Monthly chain store sales
0730 am Challenger job cut report
0745 am European Central Bank rates decision
0815 am ADP employment
0830 am Initial claims
1000 am ISM nonmanufacturing
0830 am Employment report