May 27, 2012 10:27 AM IST | Source: CNBC

Europe has Wall Street's bull on a short leash

Markets in the week ahead will again be pulled by every real or rumored development out of Europe, as investors await Friday‘s U.S. employment report.

Markets in the week ahead will again be pulled by every real or rumored development out of Europe, as investors await Friday's US employment report.

The four-day week starts off slowly with markets closed on Memorial Day in the US but by Thursday and Friday, a large batch of economic reports should provide a good look at the jobs picture, consumer spending and manufacturing activity.

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"Even if we do get a good jobs number, you can throw it out the window if Europe falls off further," said Peter Boockvar, market strategist at Miller Tabak.

"The equity market action in the next week is going to be influenced by news out of Europe," said Morgan Stanley US equity strategist Adam Parker. Parker said Morgan Stanley expects the jobs data to continue at the more sluggish recent pace than the 200,000-plus reported in the first couple of month of the year. Morgan’s forecast is for 160,000 nonfarm payrolls.

The monthly sales reports from auto makers on Friday and chain stores on Thursday should give a good read on consumer activity, and the ISM survey Friday should be an important look at manufacturing.

Boockvar said even without any scheduled summits or meetings, headlines from Europe will set the direction for markets ahead of the Greek election. The latest polls show Syriza, the leftist party opposed to the Greek bailout and austerity, is barely leading and no party is close to a majority.

"We'll trade off every poll. The Greek election is not until June 17. Anything before that is just noise unless there are policy decisions taken by the ECB (European Central Bank) and authorities before that election, in the event that they need a contingency," he said. "I don’t think we go into that day without any news from the euro zone or the ECB. There's got to be a back stop."

In the past week, a European leader summit ended with no clear path to stem the concerns about Greece. There was discussion but no conclusions about a new euro zone bond. The leaders also supported Greece's membership in the euro zone, but they emphasised it needs to keep its commitments.

Despite the rising awareness that Greece could opt out of the euro, stocks scored their first positive week in four. The Dow gained 0.7% to 12,454, and the S&P 500 was up 1.7% to 1,317. The Nasdaq gained 2.1% to 2,837.

Meanwhile, Greece’s stock market, in the past week sunk to a 22-year low, losing 11.8% for a total 30% loss since the beginning of May. "Outside of Greece, the Spanish and Italian stock and bond markets were little changed, (even) with all the noise," said Boockvar.

The fear is that if Greece leaves the euro zone, there could be bank runs in other weak peripheral countries that would be viewed as candidates to also exit the euro. Even with worries surrounding the capitalization of the Spanish banks, Spanish stocks lost just 0.4% for the week. Italy's market was up 0.8%.

The dollar index rose 1.4% for the week, while the embattled euro slumped 2% against the greenback, dipping below 1.25 on Friday for the first time since July 2010. Treasury yields were slightly higher at the long end but still in a new lower range. The 10-year was yielding 1.747 Friday.

Even with the attention on Europe, the jobs report is the big number to watch. Citigroup economist Steven Wieting expects to see just 135,000 nonfarm payrolls were added in May, up from April’s 115,000. "This is still the payback period," said Wieting, referring to the impact of an unseasonably warm winter which gave an extra boost to hiring in the beginning of the year.

Wieting said the jobless-claims data are improving, and the employment numbers should as well in coming months. For the year, as a whole, he expects to see nonfarm payrolls growing by an average 175,000.

Consumer confidence is reported Tuesday morning and it follows a surprise gain in consumer sentiment Friday. Thomson Reuters/University of Michigan consumer sentiment rose to a four year high of 79.3 form 76.4, above the early May reading of 77.4.

"Consumer confidence is better than investor confidence," said Stuart Freeman, chief equity strategist at Wells Fargo Advisors. "… For a long time, the market was better than the consumer and now consumers are moving ahead. When you have that, it ends up benefiting the market moving forward."

Freeman said a stronger consumer could help corporate earnings. "Our work suggests confidence will continue lifting through the end of the year," he said. "We think by the end of the year, we’ll see a very modest p/e expansion That's how we got to a 1400/1450 number (on the S&P) by year end."

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