Stocks need Europe end game

After stocks wrapped up their worst month in more than a year, investors will face this week with caution as things are unlikely to get better until the Europeans force their debt crisis to an end game.

A Fitch Ratings downgrade of Spain on Friday drove the three major U.S. stock indexes down 1 percent for the day. For some investors, Fitch's decision highlighted the need for the European Central Bank to come up with ber response to the debt crisis before stocks will be able to rally.

The U.S. stock market will be closed on Monday for the Memorial Day holiday.

When Wall Street returns to work on Tuesday, the first wave of May U.S. economic data could bring what investors fear most: signs that shock waves from Europe are crossing the Atlantic. That would probably show up first in the two monthly ISM surveys, seen as an early read of the U.S. economy's pulse.

If those ISM reports on the manufacturing and services sectors are weak, it will come down to a b May U.S. nonfarm payrolls number on Friday to help investors keep their faith in the U.S. recovery. The payrolls report is due on Friday at 8:30 a.m. EDT (1230 GMT).

Economists in a Reuters poll expect that the economy added 503,000 jobs in May.

"All of the macro data is going to be seen through the prism of Europe," said John Praveen, chief investment strategist at Prudential International Investments Advisers in Newark, New Jersey. "You've had this huge problem in Europe. Is there any fallout from that on U.S. economic data?"

On Sunday, Finance Minister George Papaconstantinou told a newspaper that Greece will not restructure its debt and will not need more cuts to achieve fiscal targets set in the emergency funding package it agreed with the European Union and the International Monetary Fund.

"Greece will not need additional measures, especially 'painful' measures. I see only one option ahead, delivering on our targets with consistency," Papaconstantinou told Sunday's Eleftherotypia newspaper

Blame it on Europe

Investors also will watch for negative earnings pre-announcements. Shares of a tiny IT company called Blue Coat Systems Inc plummeted on Friday after it cut its outlook, citing Europe's turmoil, while retailer Guess Inc fell after it said the weak euro would hurt profits.

On the bright side, market technicals may favor a relief rally -- providing there is no bad news.

Chart-minded investors say stocks are oversold, with the Standard & Poor's 500 Index below its 200-day moving average.

Carmine Grigoli, chief U.S. investment strategist at Mizuho Securities in New York, also points to the widening spread between the number of S&P 500 stocks advancing and declining.

"The market (is) deeply oversold, actually almost the most oversold condition we've seen since the height of the (financial) crisis," he said.

In May, the S&P 500 fell 8.2 percent in its worst monthly slide since February 2009, the month before the broad-based index hit a 12-year closing low. The Dow industrials lost 7.9 percent in May, while the Nasdaq tumbled 8.3 percent.

The sharp drop marked the worst May for the S&P 500 since 1962 -- and the worst for the Dow since 1940. It also called to mind the old stock market adage: "Sell in May and go away."

End Game In Europe?

Prudential's Praveen believes that despite slight gains in the last week of May, the U.S. stock market will not make significant progress until the European Central Bank steps up its purchases of government debt as the U.S. Federal Reserve did early last year.

"The end game in this European crisis, at least for the near term, is going to be if the ECB comes up with some kind of quantitative easing package," Praveen said.

After an initial bounce, stocks have fallen further in the three weeks since the EU approved a $1 trillion safety net for indebted nations, with financial markets unconvinced that the measures are sufficient to avert the spread of the crisis.

New Orders, Exports and Jobs

The new orders and exports components in the Institute for Supply Management's surveys on the manufacturing and services sectors could show early signs that weakness in Europe may be affecting the United States.

"There is a presumption that all the turmoil in Europe and the global financial markets is going to have a negative impact on the U.S. economy," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

The ISM manufacturing index is due out on Tuesday, the first U.S. trading day in a holiday-shortened week, while the ISM services index is due on Thursday. Both are slated for 10 a.m. EDT (1400 GMT).

"If the data hold up pretty well, it's going to be a bit of a challenge to the view that the U.S. economy is going to falter, but probably won't convince the most skeptical of people," Stanley said.

The ISM surveys' employment indexes can also indicate how Friday's payrolls number will shape up.

The headline number in the government's monthly jobs reports will be clouded by temporary Census workers. Investors probably will focus on the ADP's private-sector payrolls number for a better indication of how underlying employment trends are shaping up.

"If that is north of 250,000, then the markets will react very positively," Praveen said. "If that number comes out on the weaker side, even though the headline number may be flattered by the Census number, then we will probably have some anxiety in the markets."

[Source: By Edward Krudy, Reuters, NY, 30May10]

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