Europe Could Continue to Be a Weight on US Markets

Europe’s debt crisis could generate more turbulence Wednesday, as traders continue to debate where the U.S. stock market might find a floor.

Peter Weber | Stone | Getty Images

Many believe the S&P 500 will ultimately test the key support level of 1,340, but where it goes after that and how long it sells off is part of a bigger question about whether the market is repeating the behavior of the past two years. In both those years, the market saw double digit losses after reaching the highs for the year in April.

“We’re going to see a bit of a sideways market for the rest of May and June — market tends to run when there’s great news, and where there’s no news, fear takes over… We may have another summer selloff, but I don’t think it will be as severe [as last year] because there’s more strength in our economy,” said Carol Pepper, CEO of Pepper International.

Stocks Tuesday were whipped around, as investors watched a second party try to form a new government in Greece, following Sunday’s election. There was also nervousness around reports that Spain plans to bail out its fourth largest bank, Bankia S.A.

The Dow, down as much as 200 points, recovered from its lows and finished the day down 76 points at 12,932. The S&P 500, which fell through its 1,360 support level, reversed its steepest losses and closed at 1363, down 5 points.

On Wednesday, there are a trio of Fed speakers and little economic news, with mortgage applications at 7 a.m. ET and wholesale trade at 10 a.m. There is also a $24 billion 10-year note auction at 1 p.m.

Minneapolis Fed President Narayana Kocherlakota speaks at 10 a.m. on FOMC transparency, while Cleveland Fed President Sandra Pianalto speaks at 10:45 to a women’s leadership conference in Kentucky. Philadelphia Fed President Charles Plosser participates on a panel at the Building Resilient Cities Conference in Philadelphia.

“The focus will continue to flicker on and off Europe — when things are good in the U.S., concerns in Europe will go into background focus. But on days like these, where we don’t have much economic news, Europe will flash to the forefront,” said Pepper.

Earnings are also expected from Toyota Motors, Macy’s, AOL, Dean Foods, ING and Teva Pharmaceutical before the bell. Cisco, Priceline, News Corp, Tesla, Monster Beverage, and Activision Blizzard report after the closing bell. Bank of America holds its annual meeting in Charlotte at 10 a.m. and the CTIA wireless conference continues in New Orleans.


Whither Stocks?

Mark Luschini, chief investment strategist at Janney Montgomery, also does not believe the market will correct as much as it did in the past two years. “I think this is a bit of a carryover of what has largely been a corrective phase that’ s been underway since mid-March,” he said. “I don’t think that selling phase is over.”

Luschini said the U.S. market offers better opportunities than other equities markets and has more solid underpinnings. “We’re kind of the cleanest shirt in the hamper and that enables us to attract risk capital and for investors who want to be long equities, we’re certainly a destination for that,” said Luschini.

“I don’t think we completely decouple from what may be reverberating around the world but that’s why we’ve advocated leaning into the U.S. market,” he said.

He, too, is watching the market’s technicals. “I think that 1,340 forms a hard level of support for equity prices. I would not be surprised to see a rally off of that,” he said. “I would be inclined to be a buyer and a more aggressive buyer the lower the equity market goes.”

Oil Gets Drilled

Oil recovered from its lows to finish Tuesday down nearly a percent at $97.01 per barrel on the Nymex. It is now down 8.6 percent in the past five sessions. Brent crude, the international bench mark, was down 0.4 percent to $112.73 per barrel.

Some analysts expect oil to stay under pressure, and see WTI declining deep into the low $90s per barrel.

But Aakash Doshi, Citigroup commodities strategist, said he sees the commodity reversing course soon. “If this is not the bottom, we’re very near the bottom, said Doshi.

“We’re reiterating our bullish stance for third quarter prices, for Brent to be above $125 a barrel again,” he said. He expects WTI to be above $110 in the third quarter, before falling off in the fourth quarter.

Doshi said there are a number of factors behind the steep selloff in crude. For one, the CFTC’s new margin requirements for the CME announced last week kicked off the selling, but the rule was delayed and now expected to be implemented for several months. The selling was also pushed further by technical factors in both Brent and WTI.

He said seasonal demand should help give prices a lift. “We expect global refinery runs to increase by 2 million barrels a day, and global product demand to increase by 3 million barrels a day, from the late April and early May levels,” he said.

EIA oil inventory data is expected at 10:30 a.m.

Follow Patti Domm on Twitter: @pattidomm

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