The January jobs report could turn the tide for markets Friday, but traders say there's a lingering global risk aversion that won't easily fade away.
The government's employment report was supposed to have been the story of the week. That was until markets around the globe started focusing on the idea that sovereign debt risk in Europe goes beyond Greece, and could be a problem in Portugal, Spain, and others.
As a result, stocks sold off globally Thursday, emerging markets sunk, the euro fell, metals and energy tumbled and the U.S. dollar gained ground. Treasurys rose in a flight-to-safety trade that drove buyers flocking into the futures market.
"Sometimes Wall Street overreacts to things we don't understand. We also seem to overreact to things that are out of our control," said Patrick Boyle, managing director at LaBranche Financial.
The January jobs report, released at 8:30 a.m., is expected to show no change, but estimates range from non farm payroll losses of 100,000 to gains of 100,000. The unemployment rate is expected to move up to 10.1, from 10 percent.
U.S. stocks are now down about 7 percent from their January high and are down 4 percent for the year. The Dow Thursday tumbled 268 points, or 2.6 percent to 10,002, its worst day since July. The S&P 500 fell 3.1 percent to 1063. The dollar gained 1.1 percent against the euro, which was trading at $1.3741 per euro.
"We started with the headlines out of Europe, and we sort of morphed from a fiscal risk in Europe trade to a broader 'risk off' trade, and that's driven currency markets today. I think it's overdone," said Adam Boyton, currency strategist at Deutsche Bank.
"If we get the sort of payroll number we're looking at for tomorrow -- we're looking for (positive) 75,000 -- that will calm markets down," he said. Boyton said the market is now prepared for a negative number. "The whisper number..is a little weaker than consensus. I think the market will be relieved if it's better than down 50,000."
Steven Wieting, an economist with Citigroup, said the jobs number could be impacted by extra volatility because of the time of year. "The thing to keep in mind is that in a typical January, unadjusted employment in the United States tends to fall 2.5 million...Just in the real world, folks who were involved in things like wrapping the Christmas presents in their local retail store, they aren't there do that work come January," he said.
Wells Fargo Capital chief investment strategist Jim Paulsen said stocks could continue to sell off, and reach what would be officially a correction mode. "Could it (the decline) break 10 percent? You bet it could. But I guess what I'm saying is one of the things you've got going for you is everyone playing this correction is aware of the fact that it looks like momentum is taking us towards job creation. Do you want to be out of this market if it looks like we're going to recreate jobs again? That wasn't the risk we had six months ago," he said.
"If it gets to the point where it stars to blow into some of these general risk, contagion risk measures, it might get more concerning, but as yet it looks contained," he said. In Europe, "there are other players there that have such a significant stake in the outcome and they have the power to do something about it."
Paulsen said if the jobs number is a positive, stocks could stabilize in the morning and move higher. But if there's a miss, it could prompt a selling wave. "It really wasn't the fundamentals that put us in this situation. The worst you could say was (Thursday's jobless) claims were down, but that's not what brought us down. It was Europe. I'd feel worse if we were down because we had terrible earnings numbers," Paulsen said.
"I think the '08/'09 crisis gave way to a culture that every day wakes up looking for what can go wrong," he said.
The Labor Department is also expected to provide numbers Friday that will show revisions between April, 2008 to March, 2009. Economists believe the numbers could show another 800,000 job losses that were previously not counted.
Wieting said the markets are in a different place than they had been but the risk aversion is still there. "A lot of it is fear of what the next guy might fear, so sometimes it doesn't have to be terribly fundamental. We've had a big improvement in risk tolerance, which should help people discriminate between real and imagined risks...so you're in this murky area of fear of fears," he said.
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