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 U.S. stocks could be set for another selloff next week as the
Federal Reserve is expected to announce it will keep withdrawing its
economic stimulus, further pressuring equities already roiled by a
flight from emerging markets.
Investor sentiment turned strongly bearish this week as emerging
markets were hit by both country-specific problems and the
realization that the Fed's trimmed bond-buying program reduces the
liquidity that has boosted higher-yielding emerging market assets
and put a floor under U.S. stock prices.
The Fed's plan to gradually withdraw its stimulus has long been
expected to lead to a pullout from emerging markets. But the
prospect of an economic slowdown in China added to concerns on
Friday that emerging markets, particularly those with large current
account deficits, may struggle to support their currencies this
year.
The Fed's policy-setting committee meets on Tuesday and Wednesday.
Another cut to the monthly purchase of Treasuries and
mortgage-backed securities — to $65 billion from the current $75
billion — is all but certain, based on policymakers' recent
comments.
"Is the Fed going to zigzag with the taper, based on what we already
knew, that emerging markets were vulnerable to liquidity being taken
out of the system in the U.S.?" said Quincy Krosby, market
strategist at Prudential Financial in Newark.
"It's a moral hazard," she said, adding that regardless of when the
Fed withdraws further, the expected market reaction will be roughly
the same.
The broad selloff in emerging markets over the past two sessions
translated into the worst week for global stocks <.MIWD00000PUS> in
seven months. The S&P 500 <.SPX> slid 2.6 percent, its largest
weekly decline since June 2012.
It would be hard, however, for the Fed to skip a taper, citing a
pullback in the stock market, when the S&P 500 is just 3.1 percent
below its record closing high, set last week.
SOME SEE 'BUY' SIGNS
Economic data next week, including new home sales and consumer
confidence, is expected to continue to paint a picture of recovery
in the U.S. economy, which could help bring buyers back into U.S.
equities.
"There are good domestic reasons to expect the U.S. economy to be
doing well over the year to come, and our central expectation is
that while U.S. markets could take a temporary hit (due to the
selloff in emerging markets), the shock will not be a major one for
the U.S. economy," Deutsche Bank analysts wrote in a note released
on Friday.
The Fed's promise to keep interest rates near zero for an extended
period could also help bring back buyers. The question for investors
is: How far will the market pull back before cash flows back in?
"Ultimately, it's going to be a buying opportunity," Krosby said.
"The market needs to figure out how much of the move has been
liquidity driven and what was based on earnings."
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The technical picture deteriorated somewhat as the S&P 500 closed
below its 50-day moving average for the first time since early
October. But this week's selloff also brought momentum indicators
down from overbought levels.
In a signal that the selling on Wall Street may be overextended,
investors were willing to pay more for spot protection against a
drop in the S&P 500 than three months down the road.
The last time the spread between the CBOE Volatility Index <.VIX>
and three-month VIX futures turned negative was in mid-October,
shortly after a 4.8 percent pullback in the S&P 500 opened the door
to the last leg of the 2013 market rally.
APPLE EARNINGS TO START THE WEEK
Aside from the Fed and economic data, traders will also face next
week's flood of earnings, including results from Dow components
Caterpillar<CAT.N>, DuPont <DD.N>, Pfizer <PFE.N>, AT&T <T.N> and 3M
<MMM.N>.
Technology giants like Google <GOOG.O> and Facebook <FB.O> will also
post quarterly scorecards. Apple <AAPL.O>, the largest U.S. company
by market capitalization, will set the stage after the closing bell
on Monday.
"Earnings have not been as stellar as everyone is making them out to
be. You see massive stock buybacks, which have given that
impression," said Ken Polcari, director of the NYSE floor division
at O'Neil Securities in New York.
"Revenues are flat to down — not a good sign. At this point in the
cycle, people want to see revenues up."
With about a fourth of the S&P 500 components having reported
earnings so far, 63.9 percent have beaten analysts' expectations.
Over the past four quarters, 67 percent of companies have exceeded
bottom-line estimates.
(Reporting by Rodrigo Campos; additional
reporting by Chuck Mikolajczak; editing by Jan Paschal)
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