Innovation Update
Coming Week: Summer Stress
Liz Rappaport
06/30/07 - 06:22 AM EDT
Wall Street may be half-staffed in the holiday-shortened coming week, but the capitalist canyon will still be flooded with anxiety.
The volatility of recent weeks is likely to continue as investors digest what may have been the first steps in a broad reassessment of risk in the market.
The coming weeks are likely to remain tainted by concerns about credit conditions for financing leveraged buyouts, for subprime mortgage and other collateralized debt investors in the wake of the blowup of two Bear Stearns(BSC Quote) hedge funds, and for consumers who may suffer from mortgage resets and tighter lending standards.
In particular, traders say all eyes will be on the credit markets, where last week the financing for the leveraged buyout of Ahold's(AHO Quote) U.S. Foodservice unit was tabled.
And with volume likely light in the coming week as traders take off for the July Fourth holiday, the smallest drop of concern could lead to a tempest.
"The market can be more volatile when market participants aren't around," says Art Hogan, chief market analyst at Jefferies & Co. "You can hit these air pockets where you get big moves on little news or rumors."
Indeed, the quarter ended with a dramatic 100-point drop in the Dow Friday afternoon as word swirled through trading floors that collateralized debt securities were being marked to market, or repriced dramatically lower, as hedge funds and other investors settle up their portfolios at quarter's end.
The lowest-quality portions of the collateralized debt were being marked down as much as 80 basis points, according to sources.
ISM, Jobs Reports on Tap
In addition to the ongoing credit-market concerns, there will be plenty of economic data in the mix. The Institute for Supply Management's reports of U.S. manufacturing activity and service sector activity are expected to come in strong Monday and Thursday, respectively. Analysts have forecast readings of 55 for manufacturing and 58 for services. The data are unlikely to surprise, as most economists and traders now are well aware of reaccelerating U.S. economy. Traders will be focusing in on the prices-paid components in the reports and the employment levels. Inflation is still a concern as the Fed's slightly more dovish missive last week failed to move to neutral. Rather, the Fed kept its tightening bias and expressed lingering concerns about core inflation given the tight labor market and high energy and other commodity prices. The other big release for the week will be Friday's nonfarm payrolls report, which is expected to register a healthy addition of 120,000 jobs in June. Any job market weakness is expected to show up in the construction and manufacturing sectors, with strength coming out of the education, health, leisure and hospitality, and business services sectors, according to Ethan Harris, chief economist at Lehman Brothers. He also notes that the report may reveal more upward pressure on wage inflation, with an expected gain in average hourly earnings of 0.3% in June. Elsewhere, on Tuesday traders will digest pending home sales, which are expected to rise after two months of sharp declines. The earnings calendar is nearly empty next week, but investors will be watching for preannouncements next week ahead of the kickoff to earnings season on July 9, when Alcoa(AA Quote) reports. Currently, analysts project a 4.1% growth rate for second-quarter earnings, and companies with strong overseas operations are expected to lodge more solid gains, says David Dropsey, senior analyst at Thomson Financial. In addition to Alcoa, the first week of earnings season brings reports of companies with large foreign presences such as Pepsi Bottling(PBG Quote) and General Electric(GE Quote), among others. |
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