Developments in the Middle East will decide the market's course in the coming week, as stocks react reflexively to every turn in the oil market.
Even without rebellion in Libya and protests across the Middle East, the markets have plenty to consider. There are two days of Congressional testimony from Fed Chairman Ben Bernanke Tuesday and Wednesday, and a long list of economic reports, including ISM manufacturing data, auto sales and most importantly, the February employment report on Friday.
Oil was the story of the past week, with prices jumping 9 percent to $97.88 per barrel. On Thursday, crude was above $100 before Saudi Arabia made it clear it would provide more oil to world markets to make up for anything lost from struggle-torn Libya.
The oil price shock drove stocks sharply lower early in the week, in some of the most volatile trading in months. The market stabilized Thursday after the Saudi assurances and rallied back Friday with the S&P 500 gaining 1 percent.
The stock market had its worst week since November and its first weekly loss in a month, with the S&P 500 losing 1.7 percent to 1319; the Dow down 2.1 percent to 12,130, and the Nasdaq off 1.9 percent to 2781. As stocks sold off, buyers moved into Treasurys and the 10-year was yielding 3.424 percent at week end.
"A lot depends on what happens in the Middle East. That's going to be the determinant," said Steve Massocca, managing director with Wedbush. "If it's all quiet over the weekend and things don't really heat up, we'll probably be up on Monday." He said the market is beginning to look past the Middle East, but that could be temporary.
Traders' worst fears have been that the unrest would spread beyond Libya and affect other oil producing nations, particularly Saudi Arabia. As Saudi officials assured the world oil would be available, Saudi leaders at home initiated billions of dollars in new benefits programs for citizens this week, and King Abdullah returned to the country after a three-month leave.
BlackRock Vice Chairman Robert Doll said he doesn't think the situation in Libya will drive the stock market into a deep correction, unless events in the Middle East take a turn for the worst.
"The Fed is probably looking at the remainder of QE as insurance. If the Fed ends its program early, the market will fast forward its expectations for rate hikes."
"My view is the cyclical recovery continues. That's the main story line now. We just have an extra wild card we didn't have before that we have to keep an eye on," he said.
Fears that the rise in energy costs would stifle the economic recovery was a big factor for markets in the past week. Economists see oil impacting the economy mostly if higher prices are sustained for a long period. Goldman Sachs economists this week wrote in a report that a 10 percent move in oil prices translates to about 0.2 percent of GDP over the course of a year.
RBS economist Michelle Girard said her big concern is not so much rising energy costs, but whether they would start to impact confidence. "The big question is are you going to have oil at $100 or $120 for a year. All these shocks don't usually end up lasting that long,"she said.
"I'm more concerned about financial conditions and what that would do the economy," she said. "...If financial conditions tighten and household wealth is undermined by a stock market correction. If confidence is undermined by a stock market correction, that's what I'm worried about."
Doll said he sees oil prices ultimately falling over the course of the year, and the $15 run up in oil was not justified.
He also thinks the markets are signaling that so far, a big stock market correction from the Middle East turmoil is not in the cards. Given the market's performance in the face of concerns this past week, it is showing clear signs of resilience, he said.
"I think the market is answering the question for us," Doll said, in a quick interview Friday morning. "When people don't know, they hunker down and own less risk. Equities come down and bonds go up. If you think more of this is coming, you sell some stocks, buy some Treasurys, and buy some gold...I think the worst is behind us, and I wouldn't make that trade."
Gold was another beneficiary of the fear trade in the past week, gaining 1.5 percent to $1408.70 per ounce, but it backed down Friday as markets calmed down. Doll said he expects gold prices to continue to decline.
The dollar was a loser on the week, down 0.5 percent against the euro, to 1.3753, and down 1.5 percent against the yen.
Doll said the weaker dollar is not so much about the greenback losing its "safe haven" status in times of geopolitical crisis, but about the outlook for interest rates. "Part of what's behind the dollar/euro is people recognize the eurozone is going to raise rates before the Fed does," he said.
Job Growth, Jobless Claims
Jobs, Jobs, Jobs
A big test for the market has been and will continue to be the employment situation in the U.S. Some economists expect as many as 200,000 non farm payrolls were added in February, after January's disappointing addition of just 36,000 non farm payrolls, about 100,000 below expectations.
"Jobs is a lagging indicator and so far has not improved enough to justify having a constructive case on recovery, and I think we'll start to see it," he said.
Economists blame the surprisingly weak January report on snow storms, and some say weather could be a factor again in February. Doll said he expects to see upward revisions in January's non farm payrolls, and he expects to see the unemployment rate, which fell to a surprise 9 percent, to be revised up.
"Job growth needs to improve, and in my view it clearly will. I think we'll average 150,000 to 250,000 a month during the course of the year," he said.
Pimco senior strategist Tony Crescenzi also expects a pickup in job growth and he points to the three-year high in consumer confidence, reported this past week, and the improvement in Thursday's weekly jobless claims, as signs of a turn. "Jobless claims now below 400,000 can't be dismissed," he said. This past week's claims were 391,000.
"It looks like the last six months of 2010, the average was 125,000," in monthly job creation. He said the new trend could be 150,000. "That's important because that's the level that lets the economy have escape velocity," he said.
Credit Suisse economist Jonathan Basile said he expects non farm payrolls of 200,000 and 220,000 in private sector job creation in the February report. Basile said he believes the weather factors in January will be sorted out.
Bernanke provides his semiannual testimony before the Senate Banking committee Tuesday and the House Financial Services committee on Wednesday. Fed watchers do not expect much new from Bernanke, but traders are watching to see what he says about the Fed's quantitative easing program after three Fed officials questioned the program this past week. They also expect him to discuss whether rising energy costs could impact the economy, and they are looking for any discussion of inflation pressures.
Crescenzi said he does not think the Fed will curtail its "quantitative easing" (or QE) program to buy $600 billion in Treasury securities. "The Fed is probably looking at the remainder of QE as insurance," he said. "If the Fed ends its program early, the market will fast forward its expectations for rate hikes."
Girard agrees that the Fed is not likely to alter its program, which expires in June. As for Bernanke, there's very little new he will say. "I think for the Fed, it's just too early to make sweeping changes in the guidance they are giving," said Girard, adding the Fed will want to see first quarter data before making any changes in guidance.
"I think his testimony will be very much along the lines of what we've heard. They'll upgrade the forecast and continue to talk about headwinds.They'll acknowledge the improvement but improvement remains slow," said Girard.
Besides the jobs report Friday, there is plenty of other data this week. Monday's reports include Chicago purchasing managers data; pending home sales, and personal income. On Tuesday, there is ISM manufacturing data, construction spending and monthly auto sales. ADP's employment report is released Wednesday, and that is also the day the fed releases the Beige Book. Weekly jobless claims are reported Thursday, as are productivity and costs, ISM nonmanufacturing and retailers monthly sales. In addition to the employment report, factory orders are released Friday.
On the earnings front, AutoZone reports quarterly results on Tuesday. Costco and Joy Global report results Wednesday.
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