Greek Tensions to Persist in Coming Week

Andrea Tse

NEW YORK (TheStreet) -- Market anxiety is expected to stay at elevated levels next week as the political turmoil in Greece goes unresolved.

Next week is a very light week on the economic and earnings front and is also right before the Memorial Day holiday; so right there won't be many major drivers for the market. That means investors are likely to continue to focus on the overriding issues in Europe.

"The big question is 'what if'-type bad news like what if Greece leaves the eurozone soon?," said Ryan Detrick, senior technical strategist at Schaeffer's. "But what is important to remember is that no one has ever left the eurozone," he said.

That bifurcated view of Greece's ultimate fate should continue to fuel volatility in global markets, Detrick said.

At the same time, the heavy selling witnessed in the past two weeks means the odds of U.S. stocks catching a bounce are increasing, he added.

"We are nearing some extremely oversold levels," Detrick said. "Should we see any positive news out of Europe next week there is plenty of room to bounce."

With the market eager for some good news and a reason to rally, this bounce could come from any bit of good news from Europe, such as headlines from European Union officials saying they would prefer to see Greece stay in the single-currency bloc or else reports from Greece voicing a preference to remain there.

"But the big question is once we have that bounce, will it have any staying power?," Detrick said.

Michael Gayed, chief investment strategist at Pension Partners, has been very bullish about the prospects of the stock market, but he says he started shifting into bonds in early April.

"If you look at market action, it's been a nearly constant decline," said Gayed, who noted that the selling has picked up since the European elections on May 6 when Greece's population made a clear statement against austerity that's put it on the path to another round of elections in June and socialist Francois Hollande defeated Nick Sarkozy to assume France's presidency.

"Europe was going to take the path of austerity," to help stem the debt crisis," Gayed explained. "But then "France goes socialist. The elections in Germany dealt a blow to Merkel ... everything you understood about Europe has now been undone and is not valid anymore."

On Friday, Greece's parliament was dissolved to make way for a new round of general elections on June 17. This trip to the polls is being viewed as an indicator of whether Greece would be able to remain in the euro.

Worries are that the public will once again cast votes in favor of the parties rejecting the austerity measures included in the terms of the international bailout deal, which could lead to Greece to defaulting on its debt and leaving the eurozone, a feared event that could have volatile consequences for the region if it shakes investor confidence in other countries.

At this point, said Gayed, the only conceivable way to stop the decline in confidence is if every central bank stepped in like they did in November, when there were fears of a major European bank event, to ease financial stress by lowering dollar swap rates.

The Dow Jones Industrial Average finished the week down 3.5%; the S&P 500 lost more than 4% and the Nasdaq gave up nearly 5%.

After falling for three straight weeks, the Dow is up only 1.2% so far in 2012. The S&P 500's year-to-date gain has been trimmed down to just 3%, and the Nasdaq's appreciation is up 6.7%. At their peaks for the year, the indexes were up 9.3%, 13%, and 20% respectively.

The market's decline this week was driven by the failure of Greece to form a new government and the subsequent flare-up of eurozone debt contagion fears. Reports told of large deposit withdrawals from the Greek banking system in anticipation of the country's potential exit from the eurozone.

On Thursday, investors hoping that U.S. data would show that the world's largest economy was being insulated from fears of a stalling global economy, were disappointed by a weak reads on manufacturing activity in the Philadelphia region and leading economic indicators. On Friday, excitement over Facebook's(:FB) public debut waned amid the eurozone debt jitters.

Another development to watch, said Gayed, is that over the last 48 hours, there's been a very noticeable drop in prices of junk and sovereign debt and rises in their yields relative to safe-haven Treasurys, where the yield for the 10-year bond is sitting near record lows at 1.723%.

If there's a recovery in junk and sovereign bonds, Gayed said he believes "things will be fine." But if the trend continues, he worries that the stock market may be manifesting some very serious concerns that a credit event is looming in the United States.

With the troubles in Europe, Gayed noted that there has also been an outflow of money from emerging market growth assets and into U.S. Treasurys. Europe has previously been the biggest buyer of emerging market goods and a major pillar for emerging market growth.

The U.S. economic calendar is relatively light next week, but will include April existing home sales on Tuesday; the Mortgage Bankers Association mortgage index for the week of May 19, April new home sales and the Federal Housing Finance Agency house price index for March on Wednesday; initial jobless claims for the week ended May 19, continuing claims for the week ended May 12, durable orders for April, all on Thursday; and the final Michigan sentiment index reading for May on Friday.

On the corporate front, two ongoing stories could trump the scheduled news. After its late-session swoon on Friday, Wall Street will be watching closely to see if Facebook makes a meaningful move below its offering price of $38. That would be yet another blow for market sentiment in the United States, and get investors wondering if the lukewarm reception for the largest tech IPO ever is indicative of a near-term top.

Then there's the ongoing saga of JPMorgan Chase'sTICKER TYPE="EQUITY" SYMBOL="JPM"/> incredible swelling trading loss. The latest reports are estimating the bank's losses on its bad bet on credit derivatives could rise to as much as $5 billion by the end of the year. JPMorgan CEO Jamie Dimon could have a difficult time remaining at the helm if that's the case.

Also, Dow component Hewlett-Packard (:HPQ) is slated to report its fiscal second-quarter results on Wednesday, and the average estimate of analysts polled by Thomson Reuters is for a profit of 91 cents a share on revenue of $29.92 billion. The printer and PC maker is still in the process of transforming itself under CEO Meg Whitman and the stock fell sharply on Friday as investors processed reports that HP is planning to announce significant job cuts of as much as 30,000.

Earnings reports in focus for next week include Tech Data (:TECD) and Urban Outfitters (:URBN) on Monday; Autozone (:AZO), Best Buy (:BBY), Dell (:DELL), PetSmart (:PETM) and Ralph Lauren(:RL) on Tuesday; NetApp(:NTAP), Pandora Media (:P), Toll Brothers (:TOL), Big Lots(:BIG) on Wednesday; and Costco Wholesale (:COST), Tiffany(:TIF), VeriFone Systems (:PAY) and on Thursday.

-- Written by Andrea Tse in New York.

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