Market Insider: Thursday Look Ahead

As bears lay claim to Wall Street, it's the European Central Bank that will be a big factor in the stock market's next moves.

Two big news items will influence markets ahead of the New York open Thursday. One is the ECB's rate action, and the other is the June employment report.

The ECB is expected to raise rates by a quarter point but traders are nervously watching for comments from ECB President Jean-Claude Trichet to see if he indicates a trend toward further rate hikes. Trichet on Wednesday warned about the risk of "exploding" inflation.

Jobs data is due at 8:30 a.m. and Lehman economists expect a 75,000 drop in non farm payrolls. Traders say anything above 100,000 could spook the markets. The unemployment rate is expected at 5.4 percent. ISM non manufacturing data is expected at 10 a.m.

The Dow closed in bear market territory for the first time in the current market slide. As oil gushed higher, and GM stock drove lower, the market gave up all the gains from an early rally.

The Dow lost 166.75 points Wednesday, or 1.5 percent to 11,215. The Nasdaq fell 53 or 2.3 percent to 2251, also in bear market territory. The S&P 500 lost 23 points, or 1.8 percent to 1261, its lowest close in almost two years. The dollar dipped 0.62 percent to a level of $1.5880 per euro.

Rock n Roll

Stocks close at 1 p.m. Thursday but promise a potential blast of volatility early in the day. Patrick Kernen, who trades S&P 500 options, said he saw a rush of activity in the final 15 minutes. "Coming in at the end of the day, we saw option buying in every month in out of the money puts and out of the money calls," he said.

Kernen, a managing partner with Cardinal Capital, said there was a near 10 percent increase in the VIX Wednesday to 25.9. "We had quite a jump -- to be expected with Dow move," he said. The pre holiday lack of liquidity has exaggerated moves. "Something that might have moved the S and Ps a quarter of a percent, we're seeing move them down 3/4 of a percent."

He said if the jobs report disappoints and the ECB indicates further rate hikes, he expects stocks and the dollar to head lower. "We're going to continue on that path and if oil trades up as a result, I would see us pushing back through the lows." But if the news on jobs is good, and the ECB not that hawkish, stocks could make an exaggerated move upwards.

"I think the downside is the great risk. I hate to be pessimistic but I think that's the reality right now," he said.

After the markets close Thursday, the Fed will make news at 4:30 p.m. with the first valuation of the Bear Stearns portfolio since it agreed to put $30 billion on its books in March. The question is what does this mean for the assets at other Wall Street firms and for the Fed if there's been a decline in value?

Boiling Oil

Oil set yet another record Wednesday and is sending a shudder through the stock market. Crude finished at $143.57 per barrel, up $2.60 or 1.8 percent after a surprising drop in inventories pushed heating oil higher.

M.F. Global senior vice president John Kilduff said the fears about the ECB were also partly behind the rise in oil. "I think that is a big part of the rally. Tomorrow could see another extreme move," he said.

"If the unemployment data is bad and the ECB raises rates, oil will soar on dollar weakness due to the Fed's extreme impossible position," said Kilduff, a CNBC contributor. "Oil and gold are representing the investment of last resort or defensive investing. The lack of confidence in equities continues to push investors into hard assets."

Gold finished up $2.30 per troy ounce, or 0.2 percent at $944.80.

Materials and energy stocks though were the biggest losers even as the commodities gained. The S&P materials sector was down more than 5 percent and the energy sector was off more than 3 percent. Metals, like copper were higher, but stocks moved lower. Coal though sold off.

Stocks in the News

GM declined more than 15 percent after Merrill Lynch downgraded the stock to underperform from buy. Merrill also though scared the market by saying GM could see further downside below $7 and that bankruptcy is not "impossible if the market continues to deteriorate and significant incremental capital is not raised." GM said it has sufficient liquidity for 2008.

Nvidia shares fell sharply in late trading after it forecast lower than expected revenues and margin pressure.

After hours, the Financial Times reported that American Airlines, British Airways and Iberia are close to applying for antitrust approval to form a joint venture.

The Wall Street Journal reports that Morgan Stanley commodities chief John Shapiro, head of one of Wall Street’s largest commodities franchises, is stepping down. The firm said in an internal memo that Simon Greenshields and Colin Bryce, will immediately replace him as co-heads of global commodities.

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