Market Insider

Market Outlook: More Earnings With Wary Eye On Fed, Greece


Better corporate profits and economic news could keep the market humming, as long as the slow fuse on the Greek debt situation doesn't end with a bang.

Greece Friday asked for the $60 billion bailout promised by the European Union and IMF, and is discussing details of the package.

Even when Greece receives the funding, there is concern it may not avoid default longer term and that its collapse could spread contagion to other weak members of the European Union.

"The markets are signaling that restructuring is likely, but it's very much up in the air, and it's very uncertain. What's happened is investors were unwilling to believe that the bridge loan was sufficient because it was a bridge to nowhere," said Tony Crescenzi, market strategist and portfolio manager with Pimco.

Greece's funding needs become more dire in mid-May when it must repay an 8.5 billion euro bond.

The Fed's two-day meeting mid-week tops a substantial list of U.S. events markets will focus on in the week ahead.

A potentially thorny topic for markets is financial regulatory reform, and the first vote on the Senate bill could come Monday.

On Tuesday, Goldman Sachs will be under scrutiny when its CEO and other executives testify before a Senate investigations panel. Fabrice Tourre, the Goldman trader charged with fraud, is also expected to testify.

The Dow in the past week gained 1.7 percent to 11,204 on a batch of positive earnings news and improving economic data. The S&P 500 rose 2.1 percent to 1217 in its biggest weekly move since early March. The S&P is now 80 percent above its March, 2009 lows.

There are a number of important economic reports, including first quarter GDP in the coming week, and the flood of first quarter earnings reports will continue.

Procter and Gamble ,Caterpillar and Exxon Mobil are among the more than 150 S&P 500 companies reporting.

The Treasury also has plans to auction $129 billion in notes.

"For the next couple of months, we may see this market ratchet a little higher, but we would not be surprised to see the market back around this level as we get to the end of the year," said Stuart Freeman, chief market strategist at Wells Fargo Advisers.

"Even internally, it's performing well," said Freeman, whose year end S&P target is 1200. He expects the market to see some bumps towards the end of the year as the Fed looks set to move on rates, but it should start to move a second leg higher later in 2011.

"Even on soft days, you continue to see good performance of industrials, those cyclicals. When you get those pull backs, you don't see investors worried about the economy..They still seem to be moving cyclically and they're still moving toward mid and small caps, which is pretty much what you expect to see happen," he said.

Earnings news is helping to bolster the market's gains.

So far this quarter, 171 S&P 500 companies have reported, and 83 percent have beaten earnings estimates, and 69 percent beat on revenues, according to Thomson Reuters.

Freeman said he thinks the financial sector is already pricing in some of the impact of regulatory reform, and its gains have been capped by the uncertainty.

"I think the financials have already been expecting this for quite a while.

It's just a matter of when it starts, how long it takes to work through it and what it becomes," he said.

"Even though the financials came up dramatically off the bottom, a lot of those stocks were trading at levels where some investors thought they were going to be nationalized companies," said Freeman. "Market cap-wise, they have done what they typically would in a recovery, yet they are discounting regulation fear."

"I don't see a tremendous amount of downside for the financials, but you'll probably see more companies being scrutinized before this part of the process is over. The market kind of breezed over the Goldman news..It had a bad half day, and now we're back up again. We're going to see whether that's a rational reaction or not," he said.

If the financials do react though, it will not be good for the market.

"In order for this market to go materially higher in the next six to eight months, you have to have some pretty strong participation from the financials sector," said Freeman.

Fed Ahead

The Fed's two-day meeting winds down Wednesday with a 2:15 p.m. statement, and it is expected to be uneventful.

Fed watchers do not foresee any change in the tone nor do they expect the Fed to drop its much discussed "extended period" language.

The Fed could upgrade its outlook for the economy. Crescenzi though says the Fed may tweak the language around the phrase that it will keep rates low for an extended period.

The market has perceived the extended period to represent a six month time frame, and he says the Fed could try to weaken the idea of a set time frame.

"Whatever happens, the tonality the Fed is looking to strike is to make its actions seem more a process than an event. They can't, for example, easily announce something unexpected without it being disruptive to the economy," Crescenzi said.

He said the Fed, therefore, is not likely to announce the sale of the mortgages or other assets it took onto its balance sheet during the height of the financial crisis though it may be discussed.

"As FOMC meetings go, this one may prove less eventful. It's been pretty well telegraphed, they are not expected to change the language," said RBS senior economist Michelle Girard.

Even with the Fed, there are plenty of other economic reports that will get the attention of markets.

One of those is the first look at first quarter GDP on Friday. That's a number economists have been revising for weeks.

Consumer data is reported Tuesday with consumer confidence for April and Friday with consumer sentiment.

Housing vacancies are reported Monday, and S&P/Case-Shiller home prices are released Tuesday.

Weekly jobless claims are Thursday, as usual, and the employment cost index is reported Friday with GDP. Chicago PMI is also reported Friday.

Girard said she is expecting first quarter GDP at 3 percent.

"It's a deceleration from the fourth quarter, but the composition of growth is much more favorable. In the fourth quarter it was driven by inventories. In the first quarter, demand is broadening out," she said.

She is also expecting weekly jobless claims to continue to show a decline, to 435,000.

Economists have been disappointed by the stalling in the decline of claims numbers in recent weeks. Some believe that 400,000 is the level where job growth begins.

"There are a lot of question of whether that old mile market of 400,000 is all that meaningful," she said.

The government has blamed the rise in claims this month on seasonality and the Easter holidays.

Greek Drama

In the past week, the Greek debt situation weighed on the euro and forced yields on Greek bonds to record highs. The dollar gained 1 percent against the euro, to a level of $1.3375.

Treasurys declined on the week, sending yields higher. The 10-year was at 3.813 percent.

George Goncalves, Treasury strategist at Nomura, said Greece was also a focus in the Treasury market. He expects yields to grind higher in the coming week.

"We just came off a week where we didn't have much data, and we still managed to have a lot of volatility. I think next week amplifies that even more," he said.

The Treasury late in the week signaled to dealers that it may reduce the amount of issuance in coming months. It asked primary dealers about reducing the size of supply.

"That's important especially going into the auction week," said Goncalves, noting this is sooner than expected by some in the markets. It does not mean the Treasury will reduce the auction size in its next refunding announcement in early May, though it could.

Goncalves said Greece will continue to support the market.

"Greece is still a pretty significant risk we're dealing with...government bodies that have to come to a decision quickly, so who knows. My point is they have to but they're not," he said. "Everyone was scoffing at subprime being a non event and look what happened. Yes Greece is small, but the real risk is really contagion. I don't think Europe is out of the woods yet, which is why bond yields rise, gently higher."

Earnings Central

A big batch of companies report earnings in the coming week, in the health care, industrial, insurance, transport and energy businesses, among others.

Monday's reports include Caterpillar, Humana, Whirlpool, Reinsurance Group of America and Texas Instruments.

DuPont, 3M, UPS, Automatic Data, Boston Scientific, Ashland Oil, Newmont Mining, US Steel, Valero and Office Depot report before Tuesday's opening bell.

Aflac, DreamWorks, Norfolk Southern, Boston Properties and Torchmark report after the bell.

Wednesday's reports include Comcast, ConocoPhillips, Honda, Royal Dutch Shell, Barrack Gold, Corning, Dow Chemical, General Dynamics, Northrop Grumman, Southern Co and Sprint Nextel.

Visa, Allstate, Versigin, Owens-Illinois, Varian and Akamai report after the bell.

Exxon Mobil and Procter and Gamble are among the big names Thursday morning.

Reports are also expected from Aetna, American Electric Power, Borg Warner, Burger King, CME Group, Fortune Brands, International Paper, Occidental Petroleum, Potash, Safeway, Kellogg, Weyerhaeuser, Unilever and Viacom.

MetLife and Hartford Financial release results after the closing bell.

Friday's reports include Chevron, Simon Property, DR Horton, Allergan and VF Corp.

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