Markets fear a new set of evil twins — a stumbling U.S. economy and the specter of a European sovereign debt crisis.
Both of those worries will hold the attention of markets Wednesday, as investors look for signs of life in several U.S. economic reports and another flood of corporate earnings news.
The ADP private payroll report comes at 8:15 a.m. ET., and is a sort of preview for Friday's employment report. Challenger Gray and Christmas releases its report on layoffs at 7:30 am., and the ISM non manufacturing survey at 10 a.m. will give a look at activity in the services sector. It also contains an employment component watched by economists.
Wednesday's jobs-related data is of special interest since it comes ahead of Friday's July employment report. While the consensus is for 85,000 non farm payrolls in July, traders are speculating the number could be much lower. It also comes as the markets shift their focus away from Washington's debt feud, finished for now on Tuesday when the Senate approved a bill promising $2.1 trillion in spending cuts over a decade.
The package itself was a negative to markets, now fearful of what sort of spending cuts may be involved as the economy seems set on a weaker path. The legislation is also not viewed as being large enough to stave off a downgrade of the U.S. AAA credit rating by Standard and Poor's. Moody's Tuesday said it was putting the U.S. on negative watch but reaffirming the AAA rating for now.
U.S. stocks plummeted Tuesday in their worst day in a year. The Dow fell 265 points, or 2.2 percent, to 11,866, below the psychological 12,000 level. The S&P 500 careened 32 points or 2.6 percent to 1,254, wiping out its gains for the year in its biggest one-day loss since last August. The dollar set another record low against the Swiss franc, as investors ran for cover in the Swiss currency and also in gold. Gold rose 1.4 percent to a record $1641.90 per ounce. Treasurys also saw safe haven buying, which pushed yields to nine-month lows.
"The only thing that can save the dollar is the ISM non manufacturing survey. If the data is in line, it will be viewed as a win," said Boris Schlossberg of GFT Forex. Economists expect a reading of 53.5, slightly higher than last month's 53.3. The survey is especially important this week after markets were shaken when the ISM manufacturing survey was reported Monday at just 50.9. A reading under 50 shows economic contraction.
European credit markets will play a significant role Wednesday as investors watch to see if Italian and Spanish bonds continue their sell off, sending spreads wider against the benchmark German bund. On Tuesday, spreads were at the widest level of the euro era. French bond yields also widened, as did the already bailed Portuguese, Irish and Greek sovereigns.
"Europe is not good and the market is really pushing the envelope here. Basically what the market sniffed out quite quickly was what was done with Greece and the ESFS is not sufficient," said Greg Peters, head of global credit research at Morgan Stanley. "The ESFS is not big enough. The markets are pushing, pushing, pushing. They want the bond purchases reinstated by the ECB, which the ECB (European Central Bank) has been very reluctant to do."
On Wednesday, Italian Prime Minster Silvio Berlusconi was to give a televised address in the Chamber of Deputies in Rome in an effort to reassure his nation. Worries about the European sovereigns intensified recently as Italy became a source of concern. Investors have been skeptical that Berlusconi's government's austerity measures will be sufficient.
Barclays' Barry Knapp, who heads equities portfolio strategy, said U.S. stocks will react to Europe Wednesday. "I don't know why people thought the situation was behind us....They took half steps. Yes, they expanded the mandate of the ESFS, but they didn't really increase the size... and where's the mechanism?" he said.
Knapp said he expects stocks to stay rocky for the next couple of weeks, but then stabilize. "I think it's going to take a fair amount of positive numbers to turn things around. Certainly we're going to walk in tomorrow and things could be ugly," said Knapp. "My view here is the next two weeks are going to be tough, and for Friday's jobs numbers, the jobless claims have been turning up, but God forbid we print a negative number."
"I do believe we could get a better-than-expected back-to-school selling season," he said. Knapp said July car sales, reported Tuesday at an annual selling rate of 12.2 million are also showing improvement. The selling rate last month was 11.4 million.
Stocks have suffered plenty of technical damage in the last week, in the longest selling spree in nearly three years. The S&P 500 has fallen under its 200-day moving average, and broke below its recent lows.
Scott Redler of T3Live.com said technicals are now pointing to the 1220 level on the S&P, a point of reference from December, 2010. If it slides below that level, the next zone to watch would be the 1180 level.
"It seems the market right now is very weak and we haven't seen a reversal signal to buy," he said.
The market closed on its lows Tuesday, for the second time in a week, something it did not do often when the Fed was carrying out its quantitative easing program, Redler noted. The easing program ended June 30 and was widely viewed as being a positive catalyst for the stock market, which is down more than 6 percent since it ended.
Earnings reports are expected from Comcast (the parent of CNBC), Time Warner, Allergan, Clorox, Constellation Energy, Devon Energy, MasterCard and Marsh and McLennan Wednesday morning. Activision Blizzard, Prudential Financial, Tesla Motors, Transocean, Zipcar, Dendreon and Hartford Financial report after the bell.
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