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Big Day for Earnings and Presidential Race

Tuesday will be a major make-or-break earnings day, and it’s also a day when the presidential election will be a focus for markets.

Mitt Romney
Mitt Romney

Major blue chips, like McDonald’s , DuPont and Johnson & Johnson report before the opening bell, and Apple’s results come after the market close, capping one of the busiest earnings days of the quarter.

Also before the opening bell, Republican candidate Mitt Romney releases his 2010 tax return and a projection for 2011. The former Massachusetts governor’s staff will then brief the media on the filing. Romney has said he pays an effective tax rate of about 15 percent, the capital gains rate.

His tax return could be complex, with much of his wealth in a blind trust and investments in dozens of publicy traded companies and investment partnerships.

The other big event will be President Obama’s State of the Union address Tuesday evening, at which he is expected to call for an increase in U.S. energy production and set a goal for natural gas production, according to the Wall Street Journal.

LPL Financial strategist Jeff Kleintop, in a note, said the president may respond to Romney by suggesting a change to the rule on carried interest, so that higher income tax rates would apply, not capital gains tax rates. He also expects Obama to call on Congress to extend the payroll tax cut and unemployment insurance benefits through 2012.

Obama may also announce the framework for a settlement ending negotiations between the Administration, state attorneys general and several major financial institutions on “robo-signing” and questionable foreclosure practices.

With unemployment still painfully high, the president is also expected to call for more infrastructure and other spending to spur job creation.

Kleintop said Congress is not likely to agree to any increased spending, and the market reaction to his speech may be muted, as it often is to State of the Union addresses.

“SOTU (State of the Union) speeches see less than a 1 percent move in the stock market on the following day,” Kleintop noted.

“However, the themes and philosophy presented may shape the market’s movements in the months to come with implications for financial and industrial companies and oil prices,” he wrote.

Many on Wall Street back Romney, founder of private equity firm Bain Capital, and they see him as the Republican candidate most able to beat President Obama in his bid for re-election.

Romney, however, has lost two of three early votes, the latest of which was his defeat Saturday in the South Carolina primary to Newt Gringich, former speaker of the House.

CRT Capital chief Treasury strategist David Ader said Monday was a pivotal day for markets, as investor focus shifted to the election.

Ader said some investors became clearly concerned about Romney’s chances, and the negative sentiment was apparent in markets. Saturday’s outcome was disappointing to investors who oppose the president’s policies, “if they thought they were going to have a viable candidate to beat Obama,” he said.

Stocks finished Monday barely changed, after a morning rally fizzled once the S&P 500 bumped into a resistance zone, just above 1320. The S&P closed less than a point higher on the day at 1316, while the Dow was 11 points lower at 12,708.

Bond yields firmed, with the 10-year yield rising to 2.067 percent as investors sold for a fourth day.

Strategists have said the market has been trading on the idea that the European Union is moving in the right direction to fix its debt crisis, and that Greece would work out a deal with private investors, allowing it to collect the aid it needs.

After Monday’s close, Reuters reported that European Union finance ministers rejected a proposed deal between Greece and its private creditors on debt restructuring. The euro, which rose above 1.30 for the first time since Jan. 4, held onto much of its gains, even after the report.

“I think clearly the market is anticipating a deal will get done. I do think it’s a bump and it could weigh the euro down a little bit, but it’s still holding above 1.30,” said Boris Schlossberg of GFT Forex.

“They’re trying to get sustainability out of this deal. Even with a new deal, they have a massive amount of debt outstanding,” he said. “They still have until the end of the month to fix this. The market is acting like a lot of this is posturing.”

Schlossberg said markets will be watching European PMI data overnight New York time. “If we get a positive reading on PMI, it could give the bulls a boost. But if they’re really bad, it could unwind some of the price action tonight,” he said.

Tuesday offers little in the way of U.S. economic reports. There is the Richmond Fed survey at 10 a.m. EST, and the Treasury auctions $35 billion in 2-year Treasury notes at 1 p.m.

Earnings Central

Companies reporting earnings include Travelers, Verizon, Peabody Energy, Siemens, Coach, KeyCorp, and Kimberly-Clark, before the bell.

Yahoo, Fusion-io, Stryker, Altera, AMD and Norfolk Southern report after the close, as does tech darling Apple.

“Apple isn’t a tech stock,” quipped one strategist recently, when discussing Apple’s earnings. “It’s an asset class.”

Follow Patti Domm on Twitter: @pattidomm

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