U.S. stock index futures pointed to a rebound on Wall Street on Tuesday, after all three major indexes dropped more than one percent on Monday on concerns about Italy's election result.
Both European and Asian shares traded lower on Tuesday after Italy's election on February 24-25 resulted in deadlock, with no party gaining sufficient seats to win a majority in the country's upper house. Analysts warned a hung parliament would make it even harder to pass key legislation needed for structural and fiscal reforms.
"It was the worst possible outcome, feared by market participants and European policy-makers alike," Tobias Blattner, European economist at Daiwa Capital Markets, said on Tuesday.
"Italy is facing Greek-style political gridlock and possibly new elections."
Italy's bench market index, the FTSE MIB, traded down 4.62 percent on Tuesday and the euro skidded close to a seven-week low against the dollar, trading at $1.31.
Analysts expect Federal Chairman Ben Bernanke to try to counter market concerns about Italy, when he delivers his semiannual testimony on monetary policy to the Senate Banking Committee on Tuesday at 10 a.m. New York time.
Bernanke may also try to neutralize fears the Fed could curtail its asset purchase program, under which it purchases $85 billion in Treasurys and mortgage securities each month. In the minutes of the last two Fed meetings, there was clear discussion about the end of easing, and it was noted that some Fed members wanted an earlier end to quantitative easing.
"I think Bernanke's got a much trickier speech now tomorrow," said Barry Knapp, head of equities portfolio strategy at Barclays.
"Had the Italian elections gone as expected, he would reassure the market they weren't going to take away the punch bowl and you would have had a Bernanke bounce."
Bernanke is also likely to discuss the "sequester", the automatic spending cuts due to kick in on March 1 if Congress does not reach agreement on how to prevent them.
While Italy and Bernanke's speech will be the focus of Tuesday's trading session, investors will also eye several housing market data releases.
First off is Standard & Poor's monthly S&P/Case-Shiller home price index, a composite index of 20 metropolitan areas, out at 9 a.m. Analysts polled by Reuters forecast a 0.5 percent rise in December, following a 0.6 percent uptick in the previous month, suggesting the improvement in the housing market is continuing.
Also out at 9 a.m. is the Federal Housing Finance Agency's (FHFA) monthly home price index for December.
Then at 10 a.m., the Commerce Department will release new home sales for January. Economists in a Reuters survey forecast an annualized rise of 381,000 new sales, compared with 369,000 in December.
"Although new homes remain expensive relative to existing homes, there is stiff competition and a dwindling supply of existing homes. Admittedly, homebuilders' sales expectations have taken a knock recently. But they still look consistent with big gains in new home sales," wrote Paul Diggle, an economist at Capital Economics.
In addition, the Conference Board will release its consumer confidence index for February at 10 a.m.
Morgan Stanley analysts forecast the index will increase to 62.7 from 58.6, according to a note released on Monday, versus consensus expectations of 62.0.
Amna Asaf, North America economist at independent research firm Capital Economics, said consumer confidence was likely boosted by the stock market rally earlier this month.
"Although consumers have less cash in their pockets after the payroll tax rise and the spike in gasoline prices, the upward trend in equity prices in early February probably boosted the Conference Board's measure of consumer confidence this month. We are expecting a small rebound," Asaf wrote in a note on Monday afternoon.
On the earnings front, Dow component Home Depot released fourth quarter results before the start of U.S. trade on Tuesday that beat expectations. The home improvement retailer posted quarterly earnings per share of 68 cents, topping a Reuters consensus forecast of 64 cents.
In a note on Monday, stock analysis service Trefis said Home Depot had benefited from the recovery in the housing sector.
"Home Depot certainly seems to have leveraged the increased demand for homes and home-related products well… Meanwhile, the company has also done well to complement top-line growth with key cost reduction strategies, boosting the bottom line."
Lowe's, a competitor of Home Depot, posted results on Monday that topped Wall Street expectations, with sales benefiting from rebuilding after Superstorm Sandy.
Tuesday will be a busy day for retail earnings in general, with Macy's and Saks also posting results before the start of U.S. trade.
In addition, the Treasury is scheduled to auction $35 billion in five-year notes on Tuesday, with results to be released in the afternoon.
Treasury prices held gains on Monday after the government auctioned $35 billion in 2-year notes at a high yield of 0.257 percent.
"With sequestration looming, Treasuries could continue to rally, especially if Chairman Bernanke highlights room to continue quantitative easing, given low underlying inflation and the potential crisis in Europe, at his Congressional testimony," wrote Barclays analysts Anshul Pradhan and Vivek Shukla, in a note on Monday evening.
- By CNBC's Katy Barnato