The forecast on Wall Street is for more dizzying volatility Thursday.
For the time being, equities are likely to stay vulnerable to high speed moves and wide swings. Already this week, the Dow has lost 6.3 percent, despite the fact it rose nearly 4 percent on Tuesday. The S&P 500 lost 50 points just on Wednesday, finishing at 1,120, one point above Monday's closing level. Investors ran to the safety of bonds, driving rates toward historic low levels. Gold also shot higher, rising above $1,800 an ounce for the first time.
"I think the market is continuing to poke at the European union and it won't be satisfied until we get closure there," said Jack Ablin, chief investment officer of Harris Private Bank. European officials keep "papering over their problems with these different policies from week to week... You've got this common currency without a common policy."
Europe was at the heart of the market's pain Wednesday, as rumors swirled that France's triple-A credit rating could be cut. The theory was it could cause trouble for French banks and Europe's ESFS sovereign bailout fund, which depends on the triple A rating of France and Germany. All three major rating agencies came to France's defense and reaffirmed its rating.
The sell off in French banks spread across the globe. U.S. financials lost nearly 10 percent on concerns about exposure to European banks, and also concern that bank profits be impacted by very low interest rates and a longer than expected period of low growth.
U.S. stock futures were higher Wednesday evening as Asian stocks declined.
What to Watch
Thursday's market will have a look at the latest weekly jobless claims, expected to be around 400,000, when reported at 8:30 a.m. There is also June international trade data and the auction of $16 billion 30-year bonds at 1 p.m.
Richard Bernstein, CEO of Richard Bernstein Advisors, said the economy will be the key, and the weekly jobless claims data is one of the more important data points to watch. "If the jobless claims are like 450,000 or something, I'm going to be telling you that maybe the stock market here is justified, but I think the jury is out. The notion that fundamentals are great and you should be buying here, I don't think that's any more justified than someone telling you the world is coming to an end," he said.
Besides the data, there are a few earnings reports ahead of the bell, including Anheuser Busch Inbev , Kohl's , Sara Lee , Wendy's and Tim Horton . Nordstrom reports after the closing bell Thursday.
There are multiple causes analysts blame for the spiral downward in stocks. One is the disappointing decline in economic growth. Another is the feeling of despair about a leadership void in Washington, after the brutal fight over the debt ceiling, followed by the downgrade of the U.S. credit rating. The other factor, and perhaps the thorniest is the European sovereign debt problems that markets worry will create serious trouble for European banks, holders of European sovereign debt.
Ablin does not see an all clear for stocks until European leaders either put together a sufficient plan to solve the crisis or just let the euro zone split apart. Last Thursday, he took equities holdings down 10 percent across the board because the S&P 500 fell 5 percent below its 200-day moving average, a momentum indicator he watches.
Bernstein said the issue for the banking sector is slower growth, and the fear of problems with European banks affecting U.S. banks may be overblown. "The question is whether the financial issues start to leak into the real economy," he said.
Bernstein said he's been cautious on stocks for the last six weeks and expects more bumps ahead. "Austerity came to Washington on the fiscal side and the Fed is on hold. Monetary policy is on hold. Fiscal policy is in contraction. What should the market do? The market does well when monetary and fiscal policies are simulative," Bernstein said.
Eye's on the Fed
The Fed's statement Wednesday left markets hungry for more information from the Fed, and that started chatter Wednesday about Fed Chairman Ben Bernanke's Jackson Hole speech at the end of August. Last August, when markets were feeling pain, Bernanke spoke for the first time about quantitative easing (QE2), at the Fed's annual meeting in Wyoming. Some traders were wondering if another round of easing could be in the offing.
The Fed Tuesday did surprise markets when it said it would keep rates at extreme low levels until the middle of 2013. It also painted a dreary picture of a very sluggish economy.
Robert Sinche, head of global currency strategy at RBS, said the Fed statement may make for less volatility in some markets. "I think we've gotten a lot of the liquidation out of the way, particularly in the foreign exchange market. I think in one sense, with the Fed putting on a really long expectation for low rates into the market that we're going to take a fair amount of volatility out of the rates markets. That in turn will take a fair amount of volatility out of the FX market, particularly in the dollar crosses," he said.
The volatility will move on to the equities and commodities markets, he said. "The changes in growth expectations will really translate more into these other markets than they will into the currency market," he said, noting dollar/yen was already showing some signs of stabilizing. The dollar lost just 0.1 percent against the yen Wednesday, but gained more than a percent against the euro, which was at 1.4177.
Treasury yields continued to fall Wednesday. The yield on the 10-year was at 2.145 percent, its lowest yield since Dec. 30, 2008. the 2-year yield was at 0.184 percent, its lowest closing yield since 1973, according to Dow Jones.
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