Behind the Money

Debt Debate, Bernanke & iPhone Liven Up Typically Slow Quarter

The third quarter usually brings with it low volume and a market that goes basically nowhere as everyone from investors to Congress enjoy the final two months of the summer and then take their time getting back to business in September.

Not this quarter.

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A heated debate over the debt ceiling, a key Bernanke speech, an uncertain earnings season and the release of a new iPhone from Apple are among the juicy catalysts that could cause volatility to spike over the next three months.

“The debt ceiling standoff is going to be a game of chicken to the end and due to the fact that the conventional wisdom is that ‘cooler heads will prevail,’” said Alec Levine, associate director of listed derivatives sales and strategy at Newedge Group. “What happens if nobody flinches? That’s the story that will dominate.”

Facing down an August 2nd deadline to extend the debt ceiling, Congress and the White House have made the markets a bit uneasy lately with continued partisan bickering and insistence by key Republicans to link spending cuts or other measures to the vote. President Obama’s hard-line rebuttal in a press conference Wednesday, where he accused Republicans of trying to secure tax breaks for the rich, only increased this uneasiness.

At the end of August, Fed Chief Ben Bernanke will host his annual retreat in Jackson Hole, Wyoming. It was at this very retreat on Aug. 27, 2010 when Bernanke first hinted at a second round of quantitative easing. Stocks have soared more than 20 percent since that spark lit by the Fed Chief. The $600 billion in Treasury purchases by the central bank ended Thursday.

If economic data continues to show a slowing in the economy, investors will be looking for a creative ‘QE2’ encore at this year’s retreat. Some of the nervousness can already be seen in the bond market, which has had a vicious selloff the last four days.

“Next week you get the first round of note issuances post QE2 and yields have been up recently,” said Brian Sozzi of Wall Street Strategies. “Are the bond vigilantes smelling blood?”

The first member of the Dow Jones Industrial Average to report earnings, Alcoa , will release results on July 11th.

Following a string of weak economic reports in the quarter, analysts have slashed their expectations on more than a third of the S&P 1500 Index over the last four weeks, according to Bespoke Investment Group.

“I’m watching the company guidance going forward during the upcoming earnings season,” said Stephen Weiss of Short Hills Capital. “This will either ratify the belief that the economic slowdown was merely a soft patch initiated by the earthquake in Japan or will lead to further speculation of a QE3.”

Apple will release the latest version of its iPhone in September and may introduce a lower-end model of the phone to further expand its market share domestically and worldwide, according to several technology analysts. Apple fell four percent in the second quarter and has been trending downward on concern this new product may hurt margins.

Over the last 20 years, the Dow has averaged about a 1.5 percent increase during July, according to Bespoke. The Dow has averaged a slight decline in both August and December.

For the third quarter, traders are also keeping an eye on the situation in Europe as a bailout plan needs to be formulated by July 15, when Greece needs to start repaying maturing debt. But a successful bailout doesn’t mean the bleeding is over in the Euro-zone.

“One surprise could be the recognition Ireland won't be able to go back to the capital markets next year and will need another package too,” said Marc Chandler, head of global currency strategy at Brown Brothers Harriman.

Traders could be walking into a hurricane if any of these events don’t go as planned. In fact, hurricanes are literally another thing markets will be keeping an eye on. The first tropical storms have already started to form and Colorado State University researchers predict that there will be five hurricanes this season that are category three or higher.

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