Wall Street is in for a volatile week as escalating problems in Europe's debt crisis continue to keep investors on their toes.
With light trading volume expected this week with the Thursday Thanksgiving holiday, intraday swings are likely to be high and more frequent as traders instantly react to headlines out of Europe.
Adding uncertainty the market, a 12-member super committee in Congress appeared likely to concede failure on Monday in its efforts to strike a deficit-reduction deal as members have been unable to bridge partisan differences over taxes and spending, according to congressional aides.
While the lack of a deal could spark more selling following Wall Street's worst week in two months, expectations have been low and the ongoing debt crisis in Europe continues to be the primary driver for market sentiment.
I never expected they were going to reach an agreement and the market is clearly going to be disappointed, but I think ... the market will find support at 1,200 because in the end, the market really never thought they were going to do it, said Ken Polcari, managing director at ICAP Equities in New York.
Therefore, as long as there is no news out of Europe, we will see a disappointed market but we won't implode.
In addition, Moody's has said a failure by the committee to reach an agreement would not by itself lead to a rating change, an outcome that could have exacerbated the potential downside. However, Fitch Ratings has not ruled out a 'negative' rating action on the United States if the economy grows less than expected or if the super committee fails to agree on at least $1.2 trillion in deficit-reduction measures.
Such an action would most likely be a revision of the U.S. rating outlook to negative from its current stable position. When Standard & Poor's downgraded the United States in August, it said at the time that U.S. fiscal plans fell short of what was necessary to stabilize debt dynamics.
Despite the uncertainty related to debt uncertainty on both sides of the Atlantic, some say there are a lot of variables that could spark a rally, with Wall Street set for a technical rebound after a week where the S&P dropped 3 percent and the Nasdaq lost almost 4 percent.
If congressional super committee unexpectedly has a breakthrough before its Wednesday midnight deadline, and if we can simply get enough certainty out of Europe, the stage could be set for a fourth quarter rally that might surprise even the most bullish traders, said Randy Frederick, managing director of trading and derivatives for Schwab in Texas, Austin.
Of course, those are some mighty big 'ifs'.
European debt yields, an important risk barometer for investors these days, have shown exceptionally high correlation to equities. For the past several weeks, stocks have quickly reacted to moves in Italian, Spanish and French yields.
Now, there could be a new worry in German Bunds.
We do have a new uncertainty that has gotten a bit of attention over the past few days and that is the sell-off in the German Bund market. There has been heavy selling by Asian real money investors in Bunds the last few days, said Chuck Retzky, director of the futures division of Mizuho Securities USA in Chicago.
The Bund market is considered to be one of the safe havens for investors' money in the world and if that should show a significant crack and the selling pressure continues, then people will worry if U.S. Treasuries will see a similar sell-off in the future, he said.
On Friday, stocks erased losses as the yield on the Spanish 10-year a focus of market anxiety, eased.
Spanish elections on Sunday were also in focus. The election could help support a rise in the euro against the dollar in the very near-term, because the opposition party, which is seen as favoring austerity measures, is expected to win.
The S&P 500 <.SPX> fell 3.8 percent last week, ending its worst week in two months, but the index closed above its 50-day moving average near 1,200, showing signs of strength to move higher.
Our expectation is that the recent market sell-off is not the beginning of a whole-scale, multimonth downside collapse, but rather is likely the latter stages of a pause following a surge in October, and another upside rally attempt will develop shortly, said Robert Sluymer, an analyst at RBC Capital Markets in New York.
The overall technical set-up has not materially changed in the past few weeks.
For the week, the Dow <.DJI> fell 2.9 percent and the Nasdaq <.IXIC> lost 4 percent.
This week's economic data includes existing home sales for October on Monday and third-quarter preliminary GDP report on Tuesday. On Wednesday, durable goods orders, personal income and outlays and weekly jobless claims are due. The markets will be closed on Thursday for Thanksgiving.
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