It will be a weekend of high anxiety for investors on Wall Street, as they brace themselves for what will likely be another rollercoaster ride for the battered financial markets.
Any more signs of spreading losses tied to risky subprime mortgages are likely to send U.S. stocks into more of a tailspin next week, exacerbating calls for the Federal Reserve to ride to the rescue.
Global equity markets were roiled this week, as fears that a widening fallout from worsening lending conditions could take a bite out of economic growth and corporate profits swept through financial markets.
Worries that another shoe may drop in the global credit crisis escalated on Thursday, after French bank BNP Paribas froze three debt funds because of the turmoil in subprime markets. And analysts say there may be more trouble ahead.
What will drive the market next week? One word: Subprime. We're in the midst of it, said Chip Hanlon, president of Delta Global Advisors, Inc. in Huntington Beach, California.
The only question is whether the Fed will let it run its course or will it come to the rescue-- and it is likely that it will come to the rescue.
MORE CASH FROM THE FED?
Central banks rushed to pump extra cash into the financial system this week in an attempt to temper fears about the liquidity crisis that is gripping investors worldwide.
The U.S. Federal Reserve provided the banking system with a total of $38 billion in three separate moves on Friday, the largest amount of liquidity since the days after the September 11 attacks six years ago, adding ample funds for the second day running as financial markets fretted over credit conditions.
The Fed also took the unusual step of making a rare statement after the first operation -- the first time it's done so since the September 11, 2001, terror attacks -- in an effort to calm investors' fears.
Depending on the level of credit stress next week, you could see more liquidity injections. The Fed has already shown that if they have to, they will, said Joseph Quinlan, chief market strategist at Banc of America Capital Management, in New York.
By the closing bell, the S&P 500 squeaked out a gain of 0.55 of a point, or 0.04 percent, to finish Friday's wild ride at 1,453.64, off its session low at 1,429.74. The Dow average sharply cut its earlier losses and ended down 31.14 points, or 0.23 percent, at 13,239.54. Earlier, the Dow had fallen more than 200 points to a session low at 13,057.86. The Nasdaq closed at 2,544.89, down 11.60 points, or off 0.45 percent. The Nasdaq fell as low as 2,503.16 during the earlier plunge.
Despite the market's slide on Thursday and Friday, all three major U.S. stock indexes ended this volatile week higher: The Dow Jones industrial average gained 0.4 percent, the Standard & Poor's 500 index advanced 1.4 percent and the Nasdaq composite index rose 1.3 percent.
For the year so far, stocks are still in positive territory. The Dow is up 6.2 percent, while the S&P 500 is up 2.5 percent and the Nasdaq is up 5.4 percent.
ON INFLATION WATCH
While a heavy week for economic data may pale against the backdrop of liquidity concerns, inflation data could be important in setting a parameter for what the Federal Reserve will do next.
If you get strong inflation numbers, it puts the Fed in a difficult position, as the market wants them to cut, but they've made it very clear that their priority is inflation, said Quinlan of Banc of America Capital Management.
But if the data shows lower-than-expected inflation, it would allow the Fed to cut sooner rather than later.
On Wednesday, the closely watched core CPI, which excludes volatile food and energy prices, is expected to rise 0.2 percent in July, matching June's gain. The producer price index, due on Tuesday, is expected to climb 0.2 percent.
Consumer confidence numbers will also be closely watched, with the Reuters/University of Michigan Consumer Surveys' preliminary August reading on the consumer sentiment index due on Friday. Economists surveyed by Reuters expect the consumer sentiment index to slip to 88.0 in August from July's 90.4.
The fear is that the credit crunch means people won't be able to draw equity from their homes and spend as lavishly as they have- so any weakness in the consumer confidence will confirm that fear. said Delta Global Advisor's Hanlon.
Investors may eye U.S. retail sales data for July on Monday for clues on changes in consumer habits, as well as earnings updates from retailers Home Depot Inc and Wal-Mart Stores Inc, both due on Tuesday.
With the current focus on the housing sector, July housing starts on Thursday are likely to come under close scrutiny. The Reuters poll of economists showed that July housing starts are expected to decline to an annual rate of 1.405 million units from 1.467 million in June. Building permits for July also are likely to decline to an annual pace of 1.400 million units from 1.413 million the previous month.
Thursday's economic numbers will include the weekly jobless claims and the Federal Reserve Bank of Philadelphia's index for August.
(Wall St Week Ahead runs weekly. Any questions or comments on this column can be e-mailed to: kristina.cooke(at)reuters.com)