(Repeating item that initially moved late on Friday)
By Edward Krudy
NEW YORK, June 3 (Reuters) - Things are shaping up for another hot summer on Wall Street, and there is a long, long way to go yet.
Federal Reserve Chairman Ben Bernanke will be back on Capitol Hill on Thursday to testify before a congressional committee about the state of the U.S. economy. He's not going to get an easy ride.
The blue-chip Dow average of stocks is now negative for the year. Employment appears to be slowing to a snail's pace and Europe remains mired in crisis.
"This puts the Fed firmly in play and they will likely feel compelled to respond," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York, after data on Friday showed U.S. job growth in May was the weakest in a year.
"The missing ingredient preventing the Fed from action had been the equity market, but now we are seeing it softening," he said. "Equities are falling and that was the last hurdle for Fed policy action because all the other criteria have been met."
For last week, the Dow Jones industrial average fell 2.7 percent, the Standard & Poor's 500 index was down 3 percent and the Nasdaq composite index fell 3.2 percent.
The Fed's next policy meeting occurs on June 19-20. A Reuters poll of 15 dealers gives a 35 percent chance of the Fed extending its stimulative operating twist at that meeting. The poll showed that dealers expecting further quantitative easing, or QE3, rose to 50 percent from 33 percent in May.
Stock market rallies in each of the past three years were fueled by combinations of massive central bank and government stimulus spending. That maybe the only hope for equities this year, too.
The world's economic outlook darkened on Friday as reports showed as well as slowing U.S. employment growth, Chinese factory output barely grew and European manufacturing fell deeper into malaise.
"It certainly suggests that perhaps the softness in Europe is either influencing the U.S. or that the U.S. recovery may not be strong enough to overcome the softness in Europe," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
"I underestimated the relationship or the alignment of the world markets to the European markets," he said. "I felt that Europe could potentially proceed in their own little corner of the world. For right now anyway it just doesn't seem that way."
Nothing tells the story of the global economy at the moment better than the world's equity markets.
Bear markets are raging in Spain, Italy, Brazil and Russia. Asian stocks have been weak. Most of Europe's other markets are negative for the year, and that is where U.S. stocks are going - and fast.
"I don't see any compelling reason to think that we are going to have any sustained recovery absent new fiscal, monetary stimulus, not only here in the United States but perhaps even more importantly elsewhere around the world," said Clark Yingst, chief market analyst at Joseph Gunnar.
Yingst said that signs of more stimulus may be a compelling reason to get bullish.
We will be "watching very closely for new fiscal and monetary stimulus from a variety of countries. I think the source will be important, I think the magnitude, the scope will be important," he said.
On Friday, the S&P 500 fell 2.5 percent, edging below its 200-day moving average for the first time since December. The level is closely watched by investors, and a significant breach there could open the way for steeper losses.
That looks like a distinct possibility at the moment. Greece will face new elections in two weeks. A victory for parties that oppose the bailout led by the European Union and International Monetary Fund could start the ball rolling on the country's withdrawal from the euro zone.
Such an event would have unforeseen consequences for the global economy and financial markets. Part of the 6.3 percent drop in the S&P 500 in May - its worst month since September - was about pricing that in.
But it is anyone's guess how far stocks will fall if a Greek exit sparks the Lehman-type event that some investors fear.
Fears that the euro-zone debt crisis is spilling over to the United States sparked fresh buying of U.S., German, Japanese, Swiss and Nordic government debt, which are perceived as safe havens in times of market turbulence.
Yields on the benchmark 10-year Treasury note hit 1.442 percent, the lowest level in records going back to the early 1800s.
At the same time, funding options are narrowing for companies across the globe as issuers are shut out of markets due to risk aversion for weaker credits and demand for spread that is sending costs soaring.
Volume in the robust U.S. investment-grade market has dwindled from $284.8 billion in the first quarter to just $118.7 billion in the first two months of the second quarter, according to data from IFR, a unit of Thomson Reuters. That number is expected to fall even more in the summer.
But not everyone is hitting the sell button. Zahid Siddique, an associate portfolio manager of the Gabelli Equity Trust, said his two-to-four year time horizon and focus on value is allowing him to add to positions in sectors that are getting hit the hardest.
"Companies that we liked before are becoming more attractive from a valuation perspective and we have been buying more of those," he said. "We just buy on any dips and exit when valuations reach our assessment of value."
Siddique said he'd been adding to holdings in auto suppliers, aerospace and consumer sectors.
(Wall St Week Ahead runs every Sunday; Reporting By Edward Krudy; Editing by Kenneth Barry)
Spain financial rescue priced at $A577bn - Business Spectator
AAP
If Spain cries out for a financial rescue, analysts say the price could be €150-450 billion ($A191.94 - $A577.89 billion) or, in the most worrying case, simply "unknown territory".
Prime Minister Mariano Rajoy's conservative government refuses even to countenance a bailout.
But markets are remorseless.
Ten-year government bond yields, or interest, pierced 6.7 per cent this week.
When compared with German debt, the extra rate charged on Spanish bonds hit 5.48 percentage points on Friday, a euro-era record.
Latest figures showed a net €97 billion of investors' money fled Spain in the first three months of the year - the highest on record.
In such an environment, how can Madrid finance a banking rescue - stricken lender Bankia alone is seeking a total of €23.5 billion - and pay for the state's new expenses and existing debts?
"Against this background, it now appears all but inevitable that Spain will require a considerable bailout package to support its banks, if not the wider economy," said a report by London-based Capital Economics.
The task is daunting: Spain's economy is the fourth-biggest in the eurozone and accounts for 12 per cent of the region's output - twice that of heavily-indebted Ireland, Portugal and Greece combined.
David Mackie, chief economist for Europe at JP Morgan, said Spain wanted the European Central Bank to buy its sovereign debt and for European rescue mechanisms to intervene directly in its banks.
"Spain looks to have gotten to the point where it cannot bear the burden alone," he said.
European officials say Madrid would have to negotiate a formal rescue, however, even if the money only goes to the banks.
Whatever the format, the price could be high considering Spain's size.
A bailout of Ireland cost €85 billion, one for Portugal was €78 billion and Greece, so far, €292 billion.
Spain's financing needs this year are estimated at 86 billion euros, of which half has already been raised.
In addition, Spanish regions have debt financing costs of 36 billion euros, to which must be added €15-€16 billion in deficit financing, according to Spanish media.
Banks, heavily exposed to the collapsed property sector, could need 60 billion euros, according to the International Institute of Finance.
But a bailout would have to tide Spain over for several years.
A report for clients by HSBC calculated that over three years the costs would be €450 billion, of which €100 billion would go towards the banks.
It says, however, that such a scenario is unlikely because no-one wants to see Spain being thrown an international rescue line as it would signal that the euro crisis had reached an entirely new level.
JP Morgan tips a bill of €350 billion, including €75 billion to cover the financial sector up to 2014.
Edward Hugh, economist in Barcelona, was more pessimistic about the state of the banks.
"Some sort of attempt to rescue Spain is likely and it is likely to come in July," he said, after the June 17 Greek election and once the €500 billion European Stability Mechanism is operational.
"Up to now, they have been hoping, I think, that they could be doing just something like recapitalisation of the banks, which in my opinion could be anything up to 200 billion euros," Hugh said.
The cost of a Spanish financial sector rescue will mount if external auditors decide that banks should increase provisions against home mortgages, the analyst added.
"What they don't want to do because of the size of it is to take Spain out of the market altogether. The whole situation is pushing them towards this. We are really entering unknown territory."
Small-, mid-cap stocks beat blue-chips so far this year - Business Standard
The BSE's mid-cap and small-cap indices have outperformed their large blue-chip peers so far this year, with several of stocks giving handsome returns of as much as 70% in an otherwise downbeat market.
After witnessing sharp losses last year, the BSE mid-cap and small-cap indices have recorded gains up to 15.12% compared to the benchmark Sensex's less than 5% rise.
Cap is short for market capitalisation (m-cap), a measure by which investors classify a company's size. Large-caps have the highest market value, followed by mid-caps and small-caps.While the mid-cap index of the BSE has given a return of 15.12%, since the beginning of 2012, the small-cap index has gained 12.85%.
In comparison, the Sensex -- consisting of large-caps -- could only manage to rise by 4.51%, BSE data shows.
Typically, the mid-cap indices track the performance of companies with market value that are a fifth of blue-chip firms (large-caps), while the m-cap of small-cap firms are of almost one-tenth of an average large-cap.
According to Rajesh Jain EVP Retail Research Religare Securities: "Whenever stock markets are in an uptrend, it is observed that small-cap and mid-cap indices do much better than Sensex stocks. In the last one month when there was heavy selling in the market, these smaller stocks have fallen more than large cap stocks."
In May, the Sensex fell by 6.26%, while the mid-cap index lost 6.2% while the small-cap index plummeted by 7.47%.
He further added that, mid-cap and small-cap are higher beta stocks than Sensex scrips.
High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.
Large blue-chip stocks are usually held by big investors and they do not worry about small fluctuations.
From the small-caps, shares of scrips like Jubilant Foodworks, Bata India, HDIL, Lanco Infra and Orbit Corp have surged by 70%, 65.55%, 24.69%, 26.73% and 57.74%, respectively.
Most stocks in the mid and small-cap segments were beaten heavily during 2011, as their financial performance was impacted by rising interest rates, analysts said.
The mid-cap and small-cap indices plunged by 34% and 42%, respectively, during 2011. On the contrary, the Sensex slumped about 25% during the same period as investors bet that large-caps could weather the storm better than their smaller peers.
Macroeconomic headwinds on the global and domestic front and concerns over policy reforms influenced the market through out 2011.
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