Wall Street Week Ahead: Fed fears may be

gone but brace for volatility

By Angela Moon
NEW YORK | Fri Jun 28, 2013 6:15pm EDT
(Reuters) - Panic selling on fears of an early exit of the U.S. Federal Reserve's stimulus efforts
may be over, but the stock market may still face wild intraday swings as investors scramble to
position themselves for Friday's payrolls report.
Trading volume is likely to be thin, with a half-day session on Wednesday and markets closed
for the Independence Day holiday on Thursday. Both the Labor Department's weekly jobless
claims and employment report for June will be released at 8:30 a.m. (1230 GMT).
"Non-farm payrolls generally cause more volatility in the market, but how many times do you
see weekly claims and payrolls coming out the same day on a shortened trading week? That will
certainly cause a lot of volatility," said Randy Frederick, managing director of trading and
derivatives at Charles Schwab & Co Austin, Texas.
In the options market, traders were active in the put weekly options on the S&P 500 .SPX. These
short-term options have a week-long life span and expire on July 5. Put options are generally
viewed as bearish bets against the market.
"We've seen some buying pop up in the weeklies for next week. The most active ones are the
1,600 puts on the SPX," said JJ Kinahan, chief strategist at online brokerage firm TD Ameritrade
in Chicago.
"We will probably see more hedging activity early next week and perhaps higher intraday
swings as people try to figure out their option positions going into the holiday with the
employment report due the next day."
June's employment report could offer clues on the timing of the Fed's eventual tapering of its
bond purchases. Non-farm payrolls are expected at 170,000, below the 194,000 six-month
moving average. The unemployment rate is seen dipping to 7.5 percent from 7.6 percent.
Manufacturing will also be in the spotlight next week. The Institute for Supply Management is
expected to report on Monday that factory activity expanded in June after a surprise
contraction in May.
While U.S. markets are closed on Thursday, the Bank of England monetary policy meets for the
first time under the chairmanship Governor Mark Carney.
The European Central Bank, which also holds its monetary meeting on Thursday, is not
expected to change rates, but President Mario Draghi may discuss just how much longer the
ECB will stick with extraordinary policy settings.
SECOND HALF OF THE YEAR
The S&P 500 on Friday posted the best first half of the year since 1998, rising more than 13
percent in the first six months of 2013, fueled by U.S. monetary stimulus.
"I think that the market's pretty fairly valued, so we would be surprised if you saw the same
kind of rally like you saw in the first half of the year, but it doesn't seem to be a catastrophic
environment, like you're going off the cliff either," said Steven Baffico, chief executive officer at
Four Wood Capital Partners in New York.
For the quarter, the S&P 500 was up 2.3 percent but for the month, the S&P 500 fell 1.5 percent
on concerns of an early exit by the Fed's supportive measures.
A Reuters survey of 53 investors across the United States, Europe and Japan released on Friday
found that funds had already cut their average equity holdings in June to a nine-month low due
to the recent volatility and had held more cash.
The equities market took a hit last week after Fed Chairman Ben Bernanke signaled the central
bank would begin to slow the pace of its bond buying later this year if the economy improves as
forecast. Since then, a number of Fed speakers have sought to calm markets, giving assurances
the stimulus efforts are going to be in place for awhile.
Federal Reserve Bank of New York President William Dudley, who said markets are "quite out of
sync" with the Fed, will speak on economic conditions on Tuesday.
"I think the panic selling from the Fed is pretty much over. Now they (Fed officials) are coming
out and saying unanimously that 'we haven't changed at all, and we are possibly tapering in the
fall depending on the data,'" Frederick said.
"I think the market is believing that now, and I don't expect anything surprisingly different from
the Fed speaker next week."