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US Data Could Drive Stocks Higher Amid Oil and Europe Risks
CNBC.com | February 24, 2012 | 09:47 PM EST

Stocks face the challenge of rising oil prices and headline risk from Europe, but it could end up being the fresh economic reports on U.S. manufacturing and the consumer that drive markets in the week ahead.

The Dow

, in the past week, crossed the 13,000 mark for the first time since 2008 but failed to close above it. Stocks were up slightly, with the Dow up 0.3 percent for the week at 12,982. The S&P 500 was also 0.3 percent higher at 1365, finishing above its 2011 closing high of 1363 for the first time Friday but failing to break through its 2011 intraday high of 1370.

“I think the big round numbers are putting up a little resistance here. I know it’s the consensus, but I think we are due for a pull back. It’s more likely we’ll see (S&P) 1300 before we see 1400 and that to me would be healthy,” said Andrew Burkly, director of Brown Brothers equity strategy research.

Data in the coming week includes auto sales, chain store sales and ISM manufacturing data. Fed Chairman Ben Bernanke also gives his semiannual testimony on monetary policy to Congress, starting before the House Financial Services committee Wednesday.

The Dow

“Some of the elements of the thesis on what is causing the current rally in risk assets will come into play in the next week, and that would include reinvigorated manufacturing” said Tony Crescenzi, portfolio manager and market strategist at Pimco. “The apparent pickup in labor demand is also fueling risk assets.”

Jobless claims, improved for a fifth week this past week, will also be an important indicator when reported Thursday. The February employment report will be released March 8, a week later than the usual first Friday of the month release date.

“Bernanke is likely to be hesitant to embrace the improvements in the economy,” said Crescenzi. He also expects him to be noncommittal about another round of quantitative easing, which Fed members have said is possible if the economy needs it.

Crescenzi said the bond market will be highly focused on Bernanke. Historically, the semiannual Fed testimony has resulted in an 8 bps move either way in the long bond, but Bernanke’s testimony typically moves it less than past Fed chairmen because of the Fed’s efforts to be more transparent, he said. “There’s a slight risk (to the bond market) that he says something slightly more optimistic,” Crescenzi said.

Euro Drama

Also important for markets is the weekend’s G-20 finance ministers meeting in Mexico, where officials are expected to discuss further funding for the IMF, to help its participation with the euro zone debt crisis. A deal was not expected this weekend. “There’s some room there for disappointment,” said Brian Dolan of Forex.com.

“We’re also going to be looking for commitments to this Greek bond exchange from individual bond holders, and those are going to come out sporadically, as investors decide. Then the LTRO (special ECB lending program) will be announced Wednesday. They’re looking for a take up of more than 400 billion euros, as a sign banks are taking advantage of this, and as a sign they’re reducing their financing requirements for the year ahead,” he said. Dolan said a smaller amount could be a disappointment, and a far greater amount, as some predict, could show that there are more serious funding issues than expected.

The ECB lending program has been credited with being a spark for the stock market rally that has run since late December.

The euro has been rebounding since Greece moved to adopt austerity measures and struck a deal on its loan conditions. The euro in the past week rose 2.3 percent to 1.3449, its highest close since Dec. 1. Dolan said he expects to see the euro move higher, as shorts are squeezed. In the coming week, as the month end approaches Wednesday, he expects to see further dollar selling.

Oil Drill

In the past week, tensions surrounding the sanctions on Iran put pressure on oil prices, sending West Texas Intermediate to $109.77 per barrel, a gain of nearly 6 percent. Brent, the international bench mark, rose nearly 5 percent to $125.47. Gasoline prices have also been rising rapidly. The national average for a gallon of unleaded gasoline at the pump rose to $3.64 Friday, from $3.52 a week ago.

“We think it’s (rising oil) going to have a pretty marginal impact on the overall stock market. Our bigger concern is that stocks have run so much in a short period of time and sentiment is pretty exuberant so I think there could be any excuse for a pullback - and this is kind of the excuse,” said Burkly.

While the rising oil price could trip up stocks, it so far has not, and analysts note that absent a big spike due to geopolitical developments, the impact could be more muted than in the past. But Iran is the wild card.

“There’s not a trigger point. In other words, higher oil prices will affect the stock market on a continuous basis and it will help companies that get profits from higher oil prices and it’s going to hurt companies that depend on domestic demand in particular consumer domestic demand,” said Larry Kantor, head of research at Barclays Capital. Barclays economists noted that the gasoline price hike should not create strong headline inflation, and it should not have as much impact on consumption as it did last year because households are stronger than in 2011 and the inflation risk is less.

The Dow

The economists noted the effect on growth of rising energy prices depends on the abruptness of the increase. “We found that, given a gradual and temporary rise, consumers are able to adjust savings patterns to smooth consumption, minimizing the impact,” they wrote.

Burkly says that the improvement in the jobs market has helped make the consumer a bit sturdier, as gasoline moves higher. Therefore, the coming week’s data will be important to watch.

Economists also note that unlike last year, consumers have benefited from lower heating bills due to the unseasonably warm winter and steep drop in natural gas prices.

“The market at present believes the increase is temporary,” Crescenzi said. “The next $10 (in oil) higher will begin to feed into risk assets.” He said another $20 per barrel would pose a problem, but he also pointed to the curve for WTI, which has oil priced at about its current level next year.

Tom Kloza, chief oil analyst at OPIS, said after the past week’s run up in retail gas prices of nearly $0.40 per gallon on the West coast, consumers should expect to see another run up over the next couple of days. California prices spiked because of a refinery fire in Washington state but also because of the transition to spring/summer blends of gasoline. He said Chicago markets are also seeing the transition to the spring/summer blend, and that, together with some local refinery issues, has driven gasoline up $0.36 per gallon.

He said it‘s likely that prices will rise another $0.05 to $0.15 per gallon nationally in the next couple of days, based on current wholesale prices.

At the same time, the amount of speculators flooding in to gasoline futures has never been greater. “The money is chasing the money,” he said. “It’s a record high for gasoline, not for crude oil. The thing that impresses me is there’s no question we’re seeing a shrinking gasoline demand picture in the U.S. You can argue whether it’s going to be a five percent attrition year-on-year, but the paper market keeps on getting bigger and bigger.”

While Kloza does expect prices to continue to rise, he does not see them reaching the national average of $5 per gallon that some pundits are forecasting. The Commodity Futures Trading Commission shows a record “long” bias in RBOB (gasoline) futures, and a surge in fund holdings in WTI futures and options. Speculative buyers increased their holdings by 2,790 contracts last week, and now hold a record long position of 107,644 contracts.

He notes the net long position of 88,208 contracts, representing 88.2 million barrels of RBOB, is a new record. At a price of about $3.29 per gallon, he estimated that about $12 billion of fund money is waged on a higher price for gasoline.

Burkly said the higher energy costs have already hit the transports sector. “You’ve already seen the transportation group rolled. You don’t want to see leadership run just by energy because that would be negative longer term,” he said. He expects about a five percent decline for stocks in the near future.

The energy sector was the best performing major S&P sector this past week, gaining 1.9 percent. It is up 8.6 percent since the start of the year but trails the double digit gains made by tech (14.8 percent), financials (12.6 percent), materials (12 percent) and industrials (10.2 percent).

What to Watch

Monday

Earnings: Lowes, Dendreon, HSBC, Universal Health, Priceline.com. Great Plains Energy, CVR Energy, Human Genome Sciences

1000 am Pending home sales

1030 am Dallas Fed survey

Tuesday

Earnings: AutoZone, Transocean, DreamWorks Animation, Bank of Montreal, Cablevision, El Paso, HollyFrontier, NRG Energy, Fortress Investment, Office Depot, Rowan Cos, Tenet Healthcare

0830 am Durable goods

0900 am S&P/Case-Shiller home price index

1000 am Consumer confidence

1000 am Richmond Fed survey

Wednesday

European Central Bank emergency loan program auction (LTRO)

Earnings: Costco, Joy Global, Staples, Sea Drill, Liz Claiborne, Pet Smart, Sodastream, CenterPoint Energy

0830 am Real Q4 GDP (second reading)

0945 am Chicago PMI

1000 am Fed Chairman Ben Bernanke gives semi-annual monetary policy report before House Financial Services Committee

0200 pm Beige book

Thursday

Earnings: Wendy’s, Royal Ahold, Kroger, Big Lots, Toronto Dominion, Royal Bank of Canada, WPP, Martha Stewart Omnimedia, Foot Locker

Monthly auto sales

0830 am Weekly jobless claims

0830 am Personal income

1000 am ISM manufacturing

1000 am Construction spending

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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