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NEW YORK (Reuters) – Investors will grapple with more turbulence surrounding Europe’s deepening debt problems next week and the prospect of another round of dismal data on the faltering U.S. economy.

More volatility is almost guaranteed after the top German official at the European Central bank quit and rumors circulated throughout global markets that Greece will default this weekend. Greece later called the rumor market speculation designed to hurt the euro.

Recent market trading patterns and options activity also suggest August’s roller-coaster ride will keep apace throughout September.

Juergen Stark’s sudden resignation from the ECB on Friday came after a conflict over the bank’s policy of buying government bonds to combat the euro zone’s debt crisis, raising questions about a program that has been a key market stabilizer in recent months.

“You can tie our stock market directly to European banks — the problem they have is sovereign debt exposure,” said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

In a light week for earnings with only electronics retailer Best Buy Co Inc and diversified manufacturer Pall Corp among S&P 500 companies set to report, investors will eye a batch of data for any clues the economy has regained its footing. Economic readings over the past two months have left little reason for optimism.

But the euro zone, where a two-year sovereign debt crisis has unsettled investors worldwide, will be the real focus.

De Gan noted the ECB’s critical role in potentially solving the sovereign debt issue, highlighting the implications for global markets on any reports of internal turmoil.

“Europe matters right now — the ECB resignation, Trichet’s keeping rates flat as opposed to outright cutting them,” said Phil Orlando, chief equity market strategist, at Federated Investors, in New York. “There are rumors I can’t substantiate, but the rumors are still out there that this is the weekend Greece goes bust.

“So certainly, Europe is going to capture our attention,” Orlando said.

Data on tap for next week includes retail sales along with the consumer price and producer price indexes for August. Also expected are regional manufacturing surveys by the Philadelphia Federal Reserve Bank and by the New York Federal Reserve Bank, both of which showed contractions in factory activity last month.

“Each bit of this data theoretically gets us down the road to understanding what the true state of the economy is. I expect overreaction to rule the day,” said Kim Caughey Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

At the same time, the benchmark S&P 500 has been mired in a range of about 100 points — between 1,120 and 1,220 — for the past month, leaving the market susceptible to wide swings on a daily basis.

“We are just kind of in this nowhere zone,” said Ken Polcari, managing director at ICAP Equities New York.

“We haven’t broken through to the downside but nor have we broken it to the upside. So what you are going to continue to get is this erratic movement in the market until at some point, it’s going to have break out one way or the other.”

The continued rise in the CBOE Volatility index also points to large moves in the market. The index rose nearly 20 percent to top the 40 level for the first time since August 26, indicating a rise in investor skittishness.

“I expect high volatility next week, big swings to the upside and downside. The VIX is quite high and pretty elevated,” said Randy Frederick, director of trading and derivatives at Charles Schwab & Co in Austin, Texas.

“When the VIX is rising the way it is, that generally means the puts are going up too.”

(Additional reporting by Angela Moon and Rodrigo Campos; Editing by Leslie Adler)

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SINGAPORE (Reuters) – Stocks and metals rose on Wednesday while the dollar and Japanese bond yields fell after monetary easing moves by the Bank of Japan spurred expectations of a new round of central bank action to boost feeble economies.

European shares extended a rally that began after the BOJ’s move on Tuesday, with the pan-European FTSEurofirst 300 .FTEU3 up 0.4 percent on early trade and benchmark indexes in Britain .FTSE, France .FCHI and Germany .GDAXI rising 0.5 percent.

The unexpectedly bold action by the BOJ — which cut interest rates close to zero and said it would pump cash into the financial system through asset purchases — was seen as the first salvo in a reflationary splurge by policymakers in Japan, the United States and Britain.

Global markets are now preoccupied with the likelihood that the Federal Reserve will make a new sortie into “quantitative easing” — effectively printing money to buy assets — next month, an expectation that pushed the dollar down broadly.

Chicago Fed President Charles Evans was the latest senior official to give credence to that view, when he was quoted by the Wall Street Journal as saying the central bank should do “much more” to stimulate the sluggish recovery.

“It’s really going to be a struggle between Fed easing and BOJ easing, and whoever wins that contest is going to dictate the direction of dollar/yen,” said Gareth Berry, a currency strategist at UBS in Singapore.

The weakening dollar drove traditional safe haven gold to the latest in a series of record highs and silver to a 30-year peak, while hopes that monetary stimulus will boost industrial demand sent tin to a record and copper to its highest level in more than two years.

But ultra-low interest rates and monetary easing in the rich world has ignited fears of “beggar-thy-neighbor” currency wars, with International Monetary Fund chief Dominique Strauss-Kahn warning that countries risk undermining the global recovery if they use their currencies to try and boost domestic growth.

“There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” Strauss-Kahn said in comments published in the Financial Times on Wednesday.

STRONG YEN

The BOJ’s decision to buy a broad range of assets, including real estate investment trusts and exchange traded funds, lifted the Nikkei share average .N225 1.8 percent to a 2-month closing high, although some players remained wary of the strong yen. .T

“The most important focus seems to have been aimed at currencies but the yen hasn’t weakened against the dollar, and that’s keeping a lid on further stock gains,” said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co.

“Rather, the yen is staying on the strong side due to expectations that the U.S. Federal Reserve might announce a larger-scale easing.”

Hopes of further stimulus from the Fed pushed U.S. stocks to a near 5-month high on Tuesday, with the S&P 500 .SPX up 2.1 percent, and the exuberance continued in Asia. .N

MSCI’s broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS rose 1.6 percent to a 2-year high, led by the materials and energy sectors .MIAPJMT00PUS .MIAPJEN00PUS.

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…while euro rebounds…

During the last couple of years investors got used to a positive correlation between the stock markets and the EURUSD or at least to the money flowing towards the USD in uncertain times. Yesterday, as the major stock indices hit fresh 2010 lows in a response to poor US figures, the EURUSD was on its way up. It actually skyrocketed from 1,22 to 1,25 – the biggest move in this direction since the downtrend began in Dec’09. It automatically spurred talks of investors selling the dollar on deteriorating US fundamentals, especially given the superb performance of German exporters. Would that be true, the euro could be on a longer trip up and fore mostly, market reactions would reverse (with the euro now gaining on the poor US data and sliding on good one).

The trick, however, is that the situation was influenced by the ECB drawing back cash from the giant annual repo. First of all, the European banking sector didn’t apply for as much of a roll-over (shorter term operations) as market expected – a sign of decent liquidity and a good news for the euro. Second, the operations could have caused some direct demand for the euro on the spot market. Therefore, one should be cautious with declarations of longer-term changes in attitude towards the euro.

Nevertheless, one could have observed some early signs of trend reversing or at least stabilization on the EURUSD for a while (not going for fresh lows despite negative influence of the stock markets and premiums on debts of many European countries still around the highs), and therefore yesterday’s shot upwards was more likely to happen. A key resistance for the pair at the moment lays at 1,2660.

…sending gold down

If the euro’s upshot surprised some investors, gold’s tumble left them speechless. Despite the dollar’s depreciation and elevated fears on the stock markets, gold not only didn’t move up but it literally crashed with ounce prices going temporarily below 1200 USD. Some link this directly to positive signs from the European banking sector (alleviating fears and thus prompting liquidation from long gold positions) but the true reason might be an exhaustion of demand. Gold prices might have just completed a full 5-wave structure (or are about to do so in a near future) sending prices from 680 to 1260 USD per ounce and a large scale correction may be around a corner.

Events to watch – payrolls, payrolls, payrolls

If there is anything capable of changing the market picture in a significant way it is definitely the payrolls release (8.30 ET, 14.30 CET). However, for this to happen, the data needs to at least show a rise in employment in a private sector by some 120k which was expected a week ago (actual expectations might have slipped since then). The consensus for the headline is at -110k because of (this time negative) an impact from the census hiring.

Published on Fri, Jul 2 2010, 08:54 GMT

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