With just a few earnings and economic reports, there will be plenty of opportunity for markets to dwell on Europe and its problems. In the past week, investors began to reassess the possibility that Greece could leave the euro zone in a messy fashion, spurring bank runs in other weak peripheral countries.
While still not viewed as highly likely, those fears helped send buyers into the bond market, driving 10-year yields to historic lows. Stocks sold off, in their worst weekly performance of the year. The Dow Jones Industrial Average in the past week was down 3.5 percent to 12,369, and the S&P 500was off 4.3 percent to 1295. The Nasdaq was down 5.3 percent to 2778.
“The macro environment here is really getting very dicey and it happened quickly,” said Barry Knapp, head of equities portfolio strategy. Knapp said it’s not clear European nations are prepared to provide the policy response needed.
Knapp said if the markets viewed G8’s weekend comments as constructive, the market could get a short term bounce. “What are you supposed to do with any bounce? Sell it,” he said.
In the past week, German Chancellor Angela Merkeland newly elected French President Francois Hollande both said Greece should stay in the euro zone. Greece’s failure to form a ruling coalition after its May 6 election has now led it to a second election in June. Polls show the radical left party is in the lead, and that party rejects austerity measures agreed to as part of the Greek bailout.
Alan Ruskin, Deutsche Bank G10 currency strategist, said some of the G8’s discussion is unlikely to be made public. “Even if there’s a very small possibility [of a Greek exit], policymakers should be drawing up contingency plans,” he said.
The euro lost about 1 percent against the dollar in the past week. The U.S. Commodity Futures Trading Commission (CFTC) reports a record net speculative short position in the euro in the week ended Tuesday, notes Peter Boockvar, market strategist at Miller Taback.
The markets are also watching the European banking sector, under review by Moody’s. Moody’s downgraded Italian and Spanish banks in the past week.
JPMorgan Chase Under Fire
JPMorgan Chase will also be a focus as the Senate banking committee holds a hearing into its derivatives trading loss Tuesday. Weekend newspapers continue to highlight problems in JPMorgan’s chief investment office, with TheNew York Times pointing to internal feuding as part of the problem.
The Times also reported that the CFTC has launched a third federal investigation into the bank, and is investigating whether JPMorgan affected the credit derivatives market.
CFTC Chairman Gary Gensler is expected to disclose the agency’s investigation when he testifies at the Tuesday hearing, the paper reported.
The Wall Street Journal reported that JPMorgan is struggling to get out of trades put on by traders, including the so-called “London whale,” and that sources say its losses could reach over $5 billion. Rumors circulated in the past week that JPMorgan’s hedge unwinds were even showing up in unusual activity in the Treasury market.
On Monday, JPMorgan CEO Jamie Dimon was scheduled to face investors at a Deutsche Bank conference at 9:30 a.m. ET. JPMorgan shares lost 9 percent in the past week.
Existing home sales Tuesday and Thursday’s durable goods and weekly jobless claims top the week’s U.S. economic reports. German and euro zone PMI is reported Thursday, as is HSBC flash manufacturing PMI for China.
“I think that the economy has been slowing. It’s not as robust as it was; however, I would argue with disproportionate falling interest rates. Housing activity is picking up, gasoline prices are falling as we go into Memorial Day weekend. That can’t be bad. I think we have to be careful about getting too bearish,” said Richard Bernstein, CEO of Richard Bernstein Capital Management.
Bernstein said Europe’s problems are behind the decline in Treasury yields. The 10-year note on Thursday closed at a record low of 1.70.
“We are benefiting from the rest of the world’s problems, and the dollar is strong … the world is moving to U.S. assets as they begin to reassess the risks around the world, and I think this is great for the U.S. economy longer term,” he said.
Knapp said Tuesday’s Richmond Fed survey will be important because of the mixed results of the past week’s stronger Empire State survey, and the surprising decline in the Philadelphia Fed survey. Housing is also important.
“The one story left alive in the equity market is that the housing market is recovering faster than people thought. I think the housing market is bottoming … But I don’t think it’s about to have a robust recovery,” he said.
One of the big events for the stock market this year was Facebook’s initial public offeringFriday.