Wall Street Week Ahead: Can EU deal lift stocks for more than a day?

NEW YORK: Stocks finished the first half of the year with a bang as
investors welcomed news that the euro zone is a step closer to solving
its 30-month-long debt crisis. Now for the question: Is this rally
strong enough to last for more than a day?
The S&P 500 and
the Nasdaq posted their best daily percentage gains since December on
Friday after an agreement by European leaders to stabilize the region's
troubled banks, a pact that helped remove some of the uncertainty that
has plagued markets.
"That is the major question. Can this fuel
a longer-term rally? It can, but only to some degree if, over the
weekend and the course of next week, we don't see any major push back
or headlines that suggest that this deal is not going to happen," said
Quincy Krosby, a market strategist at Prudential Financial.
"But
I don't think this is a major game changer. I do, however, think that
this is really the first time we got a relatively immediate answer to
what they (the euro-zone leaders) are going to do about the issue."
Under
pressure to prevent a catastrophic breakup of their single currency,
euro-zone leaders agreed on Friday to let their rescue fund inject aid
directly into stricken banks starting next year and intervene in bond
markets to support troubled member-states.
They also pledged to create a single banking supervisor for euro-zone banks based around the European Central Bank in a landmark first step toward a European banking union that could help shore up struggling member Spain.
PARTY TIME
Wall
Street's previous reaction to euro-zone bailout packages or other
rescue plans had been somewhat muted. Initial gains would quickly
disappear by the day's end as investors realized that there isn't a
quick fix to the region's problems.
On Friday, it was a
different story. The three major U.S. stock indexes jumped 1.5 percent
to 2 percent shortly after the opening bell on news of the euro-zone
agreement.
By the close, stocks ended at session highs with the
major indexes up between 2 percent and 3 percent. The Dow Jones
industrial average <.DJI> surged 277.83 points, or 2.20 percent,
to end at 12,880.09. The Standard & Poor's
500 Index <.SPX> jumped 33.12 points, or 2.49 percent, to finish
at 1,362.16. And the Nasdaq Composite Index <.IXIC> shot up 85.56
points, or 3.00 percent, to close at 2,935.05.
For the week, the Dow rose 1.9 percent, the S&P 500 advanced 2 percent and the Nasdaq gained 1.5 percent.
For the month, the Dow added 3.9 percent, the S&P 500 rose 4 percent and the Nasdaq climbed 3.8 percent.
But for the second quarter, the Dow dropped 2.5 percent, the S&P 500 slid 3.3 percent and the Nasdaq lost 5.1 percent.
Despite
the weak second quarter, the three major U.S. stock indexes wrapped up
the first half of the year with decent gains: The Dow was up 5.4
percent, the S&P 500 was up 8.3 percent and the Nasdaq was up 12.7
percent.
"The next question is whether the ESM/EFSF will have
enough capital and assuming they don't, will the ECB chip in by giving
it a bank license, thus leveraging its size. That is yet to be
determined," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
"For
now, party on and turn that hourglass over as more time has been
bought. But only the symptoms are being fought as the underlying
disease of excessive debt and lack of growth still remains."
The
leaders of the 17 European Union countries agreed on a series of
short-term steps to shore up their monetary union and bring down the
borrowing costs of Spain and Italy, seen as too big to bail out.
To
that end, the euro zone's temporary European Financial Stability
Facility (EFSF) and permanent European Stability Mechanism (ESM) rescue
funds will be used "in a flexible and efficient manner in order to
stabilize markets" to support countries that comply with EU budget
policy recommendations, a joint statement said.
Any market
reaction to further developments next week could be exaggerated by
lighter-than-usual volume. Wall Street trading desks may be more
sparsely populated because it will be a short week. The U.S. stock
market will be closed on Wednesday, the Fourth of July, in observance
of Independence Day. That could break any weekly momentum when Wall
Street resumes trading on Thursday.
ALL EYES ON THE ECB
The
market's focus shifts to the European Central Bank next week as
investors wait to see whether it cuts interest rates to complement the
measures taken by EU leaders to shore up banks and bring down borrowing
costs for Spain and Italy.
Most economists polled by Reuters
expect the ECB to cut borrowing costs on Thursday, July 5, at its
meeting, which takes place against a darkening economic backdrop.
But
internal resistance to the central bank reviving its bond-buying
program remains high. The ECB has already loosened its collateral rules
to make it easier for banks in Spain to access its funds.
"Investors
have to be cautious because the market may be getting ahead of itself.
We really don't have any details. The big question is still what
direction the ECB takes next week," said Omer Esiner, chief market
analyst at Commonwealth Foreign Exchange in Washington.
"It's
(the EU deal) certainly not a silver bullet for the debt crisis, but
the market is kind of acting like it is. It may set us up for another
push down in the weeks ahead."
Stocks had enjoyed a run earlier
this month on hopes that global central banks would announce additional
measures to stimulate economic growth, which has been tepid.
On
June 20, the Federal Reserve extended its "Operation Twist" program to
sell short-term securities and buy longer-term ones to keep long-term
borrowing costs down. But investors were disappointed when U.S. Federal
Reserve Chairman Ben Bernanke,
who spoke at a news conference after the Fed's two-day policy meeting,
gave few hints that further monetary stimulus was imminent, denting
hopes of cheap money in the equities market.
European bond
yields will be closely watched next week. Madrid will auction
three-year, four-year and 10-year bonds at a primary auction on
Thursday in another big test for Spanish yields that are still not far
below 7 percent.
France will sell between 7 billion and 8 billion euros in long-term bonds on Thursday.
Next
week's data includes the Institute for Supply Management's U.S.
manufacturing index and construction spending on Monday, followed by
factory orders and June car sales on Tuesday.
After the holiday
on Wednesday, investors will face a blitz of economic indicators. On
Thursday, weekly jobless claims and mortgage data, ADP's private-sector
payrolls report and the ISM's U.S. services-sector index will be
released.
On Friday, the government's June nonfarm payrolls
report will come out. Economists polled by Reuters have forecast a gain
of 90,000 jobs, with the U.S. unemployment rate holding steady at 8.2
percent. - Reuters