U.S. markets will more likely heed the words of European Central Bank President Jean-Claude Trichet than Fed head Ben Bernanke Thursday.
The European Central Bank holds a rates meeting before the New York open, and should make a statement by 7:45 a.m. Trichet then conducts a briefing, and thanks to the Greek debt crisis, New York's trading desks were as full of speculation about the content of the ECB's statement Wednesday, as they normally would be about a statement from the Fed.
Fed Chairman Ben Bernanke speaks at 9:30 a.m. at the Chicago Fed's 46th annual conference on bank structure and competition. Markets will also be watching the weekly jobless claims data and April sales reports from chain stores.
"I think it will overshadow claims," said J.P. Morgan economist Michael Feroli of the ECB.
"It kind of sounds like no one knows what the legal limits are for the ECB. What they can and can't do," he said.
Strikes and an outbreak of violence in Greece kept the focus on Europe's sovereign debt troubles Wednesday. Stocks and risk assets took an early dive as the euro wobbled. Stocks later moved into positive territory but closed lower, hostage again to the maneuverings in Europe. The Dow was down 59 at 10,866, while the S&P 500 was off 7, at 1165. The decline follows Tuesday's more than 2 percent drop.
"Markets went up in a straight line for 14 months and needed a correction," said David Kotok, chairman of Cumberland Advisers. He said the charges against Goldman and proposed new financial regulations, as well as the oil spill in the Gulf, all come as the sovereign debt situation in Europe continues to spiral. On Wednesday, Moody's warned it could cut Portugal's credit rating two notches in he next three months, after cutting its credit rating last week.
"All these catalysts came at once," said Kotok. "It wouldn't surprise me to see another 5 to 8 percent from here -- 10 percent correction overall...Sentiment was too bullish. It's being shaken up."
Kotok said he has the highest cash positions he's had in 18 months. "I'm waiting for the buying opportunity. I think it's coming and it's lower than here," he said.
Feroli said there's currently no impact on the U.S. economy from Greece. "Right now, if you freeze time and say the euro stays where it is, and everything else stays where it is, the move in the euro is not a big deal. But if European banks weaken significantly, the ocean isn't wide enough to keep it from affecting us," he said.
What to Watch
The British general election is Thursday, and it is seen as a close and unpredictable race. Polls predict that a hung parliament is the most likely outcome and odds favor the Conservatives, led by David Cameron, to oust Prime Minister Gordon Brown's Labour Party.
"If there is a clear outcome, and it looks like there's a government that could stay in office for some time, and it has at least a sporting chance to deal with the financial problems we've got, I think the market would be quite happy with that. Sterling could do reasonably well against the euro and possibly the U.S. dollar," said George Magnus, senior economic adviser at UBS Investment Bank in London. If there is lingering uncertainty about which party is in control, he said it could be a big negative for the British pound.
Jobless claims Thursday are expected at 8:30 a.m., as are productivity and costs data.
Chain stores release monthly sales throughout the morning. Thomson Reuters expects sales for its index of retailers to be up 1.7 percent. Discounters are expected to perform the best, with a gain of 4.5 percent. Costco is expected to be one of the strongest, with a gain of 11.2 percent. Department stores are expected to slip 1.2 percent in April, and apparel is expected to rise 2.2 percent. The early Easter holiday, in March, pulled sales forward that normally may have come in April.
Besides Bernanke's early morning speech, Richmond Fed President Jeffery Lacker speaks at 1 p.m. on the economic outlook in Richmond, Va.
Treasury Secretary Tim Geithner and former Treasury Secretary Hank Paulson both appear before the Financial Crisis Inquiry Commission Thursday, as do executives from GE Capital, Pimco and State Street.
There are a number of key earnings, including AXA, Dr. Pepper Snapple, Sothebys, Kraft Foods, Precision Castparts, Activision Blizzard, Hyatt Hotels and Cigna.
The Federal Communications Commission Thursday is expected to unveil its roadmap for regulating broadband.
The euro lost another percent in Wednesday trading, as investors continued to bash the currency on fears of contagion among southern European countries. The euro was at $1.2823, below $1.29 for the first time since March, 2009. As the dollar gained, risk assets fell. Oil traded below $80 for the first time since March 26. Treasurys, meanwhile, saw a continued flight to safety trade, which drove the yield on the 10-year lower to around 3.543 percent.
"(German) Bunds shouldn't be the only one 3 percent or under. Treasurys could get there pretty quickly. I wouldn't be surprised to see the 10-year at 3.25," said Nomura Treasury Strategist George Goncalves.
Goncalves said the ECB meeting and a Spanish bond auction are the most important events for Treasurys Thursday.
"I just think it's going to be very hard to get rates higher unless there's clarity with what happens in Europe, and the economic situation can only improve. We have to do better (on economic data) than what we are expecting," he said. Goncalves noted that stocks slipped below the key levels of 1167/1168 on the S&P 500 and still look wobbly.
"If you bought the 30-year Treasury index a month ago, you're up 7.6 percent. That's huge. If you did the same thing for stocks in the S&P, you're down 1 percent," he said.
"Something's brewing out there," he said. "You have money leaving Europe, coming to the U.S. but it's not coming into U.S. assets that are risky. It's going into Treasurys."
What Now Trichet?
The ECB Thursday is not expected to move on rates, but there's speculation that it will undertake moves that look similar to something the Fed might have done in its quantitative easing programs.
"I think the q and a will be the most interesting part. You have to keep and eye on that and see if there is any indication they would be buying government bonds. If they do, they break all their principles," said Goncalves. Now, the ECB accepts sovereign debt as collateral but does not outright purchase it.
Brown Brothers currency strategist Win Thin, in a note, says that the ECB officials have denied out right bond purchases, but used phrases like "at this stage" or "at present." He said it is unlikely the ECB would take that step and the speculation it would started after it agreed to accept Greek bonds for refi operations, regardless of rating.
"It seems possible that the ECB at some point reopens its offer to provide unlimited 3-, 6- and 12-month money at the fixed 1 percent rate if the European interbank market shows serious stresses stemming from the Greek contagion. Again, we don't think we're there yet," Thin wrote.
Germany's parliamentary budget committee backed the Greece bail out package Wednesday, giving some encouragement to markets that the German parliament would vote in favor of it Friday. The bailout is very unpopular in Germany, and there has been concern German politicians would not endorse it.
Magnus said risks remain for the German approval, including the possibility the matter could be taken to Germany's Constitutional Court. Even if it is approved by the parliament Friday, he said there could be huge political fallout for Chancellor Angela Merkel, who faces a regional election in North Rhine-Westphalia on Sunday, where she could lose her majority.
"I think it's a complete mess, and they've really mishandled it. The risk that there would have been a violent reaction to this was always a very, very big risk. I think they've missed a golden opportunity to diffuse it, to try to firewall Greece. That was the whole objective of this exercise, and it's failed miserably," he said.
Magnus said Trichet has been forced to back down on a number of issues, including accepting Greece's junk-rated bonds as collateral. "Previously they never agreed to take those bonds as collateral. New they're taking any bonds...They've basically effectively opening the window, the liquidity spigot to help the Greek banks," he said.
He said the ECB should take some sort of step similar to the U.S. TARP program for sovereign debt and force restructurings. "It's about more than just contagion. After the package was announced, a lot of people expected there to be some relief in the market, a rally. The reaction was 'if they took this long to do this much and it feels like it was the final push. What do you do as a finale?'
"It's about Greece, but it' not about Greece because Greece has been removed from the market place. It doesn't have to go to the market place to raise money but Spain and Portugal do, and banks obviously carry huge positions in bonds of periphery countries," he said.
"It's a very fluid situation. No templates. No rules. No tools. No institutions to guide us. They are basically winging it," Magnus said.
Feroli, in a note Wednesday, said there are several ways the European sovereign situation could impact the U.S. economy but the biggest would be through the banking system.
Feroli noted one way the European debt situation could impact the U.S. economy would be if there is a big slow down in European demand. A one point reduction in European demand growth should reduce U.S. GDP buy about 0.2 percent and the result is spread over two years.
He notes the financial spillover risks are more worrisome, as they are harder to measure. BIS data shows the exposure of U.S. banks to Greece is $16 billion, and $58 billion for Spain and $5 billion for Portugal. But the unmeasured exposure is between U.S. institutions and European institutions that are exposed to the European periphery.
"If the euro crisis remains limited to a weaker euro and possibly slower European growth, even with the offsetting influence of lower rates, the net effect will be slower US growth, but we suspect this would be swamped by the force of the cyclical recovery. The situation would become much more portentous if the health of the broader European financial system were compromised, and would constitute a risk to the US outlook that even the cyclical recovery would have difficulty contending with," he wrote.
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