WALL Street is in for a volatile run this week as escalating problems in Europe’s debt crisis continue to keep investors on their toes.
With light trading volume expected due to the US Thanksgiving Day holiday on Thursday, intraday swings are likely to be wide and frequent as traders instantly react to headlines out of Europe.
In addition, a 12-member “super committee” in Congress has until midnight on Wednesday to strike a deal involving tax increases and spending cuts to rein in federal spending. Investors are concerned that failure to reach a deal would result in automatic reductions that would harm the fragile recovery.
But with Wall Street poised for a technical rebound after finishing the worst week in two months last week, some say there are a lot of variables that could spark a rally.
If the super committee can come up with a workable deficit reduction plan and if progress can be made in Europe, “the stage could be set for a fourth-quarter rally that might surprise even the most bullish traders”, said Randy Frederick, of Schwab in Austin, Texas. “Of course, those are some mighty big ‘ifs’.”
European debt yields, an important risk barometer for investors these days, have shown exceptionally high correlation to equities. For the past several weeks, stocks have quickly reacted to moves in Italian, Spanish and French yields.
Now, there could be a new worry in German Bunds.
“We do have a new uncertainty that has got a bit of attention over the past few days and that is the sell-off in the German Bund market. There has been heavy selling by Asian real money investors in Bunds the last few days of last week,” said Chuck Retzky, of Mizuho Securities USA in Chicago.
“The Bund market is considered to be one of the safe havens for investors’ money in the world and if that should show a significant crack and the selling pressure continues, then people will worry if US Treasuries will see a similar sell-off in the future,” he said.
On Friday, the Dow and S&P erased losses as the yield on Spanish 10-year bonds eased.
Yesterday’s Spanish elections could help support a rise in the euro against the dollar in the very near term because the opposition party, which is seen as favouring austerity measures, scored a landslide win according to exit polls.
The S&P 500 fell 3.8 per cent last week, ending its worst week in two months, but the index closed above its 50-day moving average near 1,200.
“Our expectation is that the recent market sell-off is not the beginning of a whole scale, multimonth downside collapse, but rather is likely the latter stages of a pause following a surge in October, and another upside rally attempt will develop shortly,” said Robert Sluymer, an analyst at RBC Capital Markets in New York.
Last week, the Dow Jones industrial average fell 2.9 per cent and the Nasdaq lost 4 per cent. This week’s economic data includes existing home sales for October on Monday and third-quarter preliminary GDP report on Tuesday. On Wednesday, durable goods orders, personal income and outlays and weekly jobless claims are due. The markets will be closed on Thursday for Thanksgiving.