Market Insider

Thursday Look Ahead: Europe Sets Tone as Markets Countdown to Sunday Summit

U.S. markets face some important economic data and a slew of corporate earnings reports, but European news will once more likely drive the direction Thursday.

European Central Bank
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Weekly jobless claims are released at 8:30 a.m. ET, and the Philadelphia Fed survey, existing home sales and leading indicators are at 10 a.m. Before the bell earnings include AT&T , Nokia , Eli Lilly , Nestle, Blackstone , Diamond Offshore , Southwest Air , Ingersoll-Rand , and Union Pacific .

As Sunday's summit of European leaders ticks closer, traders are getting increasingly nervous about the outcome of the meeting. The jitters show up every time a new headline crosses the newswires.

Wednesday's headlines du jour included a Reuters story about French President Nicolas Sarkozy heading to Berlin because talks with Germany stalled over how to increase the firepower of the 440 billion euro European Financial Stability Facility(EFSF) bailout fund. Then the Financial Times weighed in with a piece on how the bank recapitalization may be just 100 billion euros, or less, while the IMF has identified a 200 billion euro hole. In between, the Wall Street Journal reported that European officials were discussing ways to use the bailout fund to provide collateral for guarantees on bond issues.

Stocks closed lower, with the Dow off 72 at 11,504 Wednesday and the S&P 500 down 15 at 1209. The euro was up about a half percent at 1.376 but well off its highs for the day in late trading.

"I don't think the market's going to be happy with what we get, but the tail risk of a meltdown has diminished," said Mark McCormick, currency strategist at Brown Brothers Harriman. "The whole point is Greece, at current debt levels, is unmanageable, and Greece needs to have their debt written down 50 to 60 percent. You then need something to recapitalize the banks. Is it going to be the governments or the EFSF? You need to do something to support the EFSF in case it needs to support the sovereigns of Spain or Italy. I'm hoping by at least the euro zone summit, we'd find out what Greece should look like and how they intend to leverage up the EFSF, or least explain how they intend to provide more firepower."

Greece, meanwhile, was the scene of violent protestsWednesday in the first of two days of massive strikes ahead of Thursday's parliamentary vote on a fresh austerity package. The vote is expected to pass.

Losing Nerve Trade?

Thursday's weekly jobless claims are expected to come in around 400,000, a level claims have stubbornly held for weeks. The Philadelphia Fed survey, at minus 17.5 last month, a 28-month low, is expected to improve to minus 10.

"Our view is the hard data actually looks decent, not great, but the sentiment is still soft...I think the Philly Fed could be awful," said John Canally, investment strategist for LPL Financial.

But Canally said even before the day is out Thursday, traders may already be worried by the potential outcome of events over the weekend and start to unwind positions. On Friday, European finance ministers meet ahead of Sunday's summit.

"You could have people saying 'I don't knew what they're going to say, but I'm not going out on a limb here. Let's just lighten things up and prepare ourselves for next week.' It's another working on the weekend thing, which hardly ever works out well," he said.

Canally said he fears the European outcome could be similar to the drama around a much-anticipated speech by Treasury Secretary Tim Geithner in the thick of the financial crisis, which ended up falling flat and sending stocks to the March, 2009 lows.

"The last time we came out of a weekend with a positive result was the weekend when (German Chancellor Angela) Merkel and Sarkozy met, and it wasn't a big 'to do.' Every other weekend, when there was a big meeting, they would come out of the weekend, and it would be with some soft pedaled communiqué. This weekend feels like one of those meeting weekends, when there's a lot of hype," Canally said. "..of course they do have the next deadline, the Nov. 3 deadline when they're supposed to have it in place and present it to the G20."

Canally said a negative surprise from Europe could send stocks back toward their lows. "The market is very concerned about a Lehman type event in Europe...when Greece defaults, are the banks prepared? Are they ring fenced? is the next domino ring fenced?"

But he also said he is increasing risk positions at the moment, with equities and oil. "The positions we have in ETFs are tilted toward things like semiconductors, industrials and materials. We're betting there's not a global recession and Europe can get its act together," he said.

Earnings Central

So far this quarter, corporate earnings have seemed to be a mixed bag, but 67 percent of the S&P 500 companies reporting as of Wednesday beat earnings estimates, according to Thomson Reuters. Twelve percent met estimates and 21 percent disappointed. Seventy-seven percent of the companies beat their revenue estimates.

"I think the earnings are good," said Wells Capital Management chief investment strategist James Paulsen. "But you've got to admit it leaves a taste in your mouth that they're not doing so well because of the big name misses. The Apple, and the Goldman...big names and names that never miss."

Paulsen said one encouraging thing he's watching in the market is the relative outperformance of consumer discretionary stocks. "The consumer has always been at the epicenter of worry here, and we're talking recession and everything here, and here's the consumer at the front of the market."

American Express , a barometer for consumer activity, reported better than expected earnings after Thursday's close. Its card holders increased their spending by 16 percent and bad loans declined. American Express and other credit card companies, however, reported earlier in the week that delinquencies rose slightly in September. eBay , also reporting, disappointed investors with its fourth quarter forecast and comment that the company expects an "okay to solid" holiday season.

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