Stocks On Ice As Europe, Supercommittee Worries Simmer

U.S. stocks were leaning higher Friday to cap off a rough week in which the major indexes were hammered by Europe’s ongoing debt crisis.

The Conference Board’s index of leading economic indicators was up 0.9% in October, better than September’s 0.1% rise and better than expected. Like other recent data suggesting improved, albeit tepid, growth in the U.S., including a decline in jobless claims and an uptick in single-family housing starts, Friday’s report was given short shrift by a market preoccupied with the goings-on in Europe.

The major averages were just about stuck in neutral in afternoon trading, with the Dow Jones industrial average leading the way with a 21-point gain to 11,792. The S&P 500 lost 1 point to 1,215, while the Nasdaq fell 11 points to 2,577.

Among stocks in the news, Hewlett-Packard gained 2.6% after naming activist investor Ralph Whitworth to its board of directors late Thursday, while H.J. Heinz lost 3.4% after issuing a 2012 earnings forecast that was short of expectations. Bank stocks were little changed, with Dow components Bank of America and JPMorgan Chase leaning slightly higher, while Sirius XM Radio added 4% after Lazard raised its rating on the stock to buy.

Italian bond yields cooled off a bit Friday – the 10-year falling to 6.63% -- while the market turned up the heat on Spain, which may be the next front in the showdown between policymakers and bond investors.

Dean Popplewell, chief currency strategist at Oanda, said the euro continues to trade in a tight range – the currency was slightly higher Friday at $1.3511 – because of the uncertainty over whether the European Central Bank will step in as a lender of last resort in a bid to stem the tide of a crisis that has leaped from country to country and shows no signs of stopping without a policy response that firmly says “the buck stops here.”

“The question is ‘how can Germany prop up the Eurozone?’” says Popplewell, who compares the current situation to the Titanic, after it hit the iceberg. “It’s going down in slow motion, but it is inevitable that it will sink.”

Europe is trying to be creative in finding a solution, but the seemingly simple idea of the ECB stepping in with a massive bailout is far more complicated and requires bureaucratic footwork that presents a tremendous challenge.

One possibility Popplewell believes could soothe the market: a plan to shift some public debt onto the balance sheet of private institutions in Italy in a bid to get the country’s debt to GDP ratio closer to 100% than 120% over the next five years. If the new government led by technocrat Mario Monti could accomplish something along those lines, which would likely need guarantees or some form of bank aid from the ECB, it might help the seemingly intractable issue of spiraling debts and stagnating growth.

Spain is even more of a headache though, Popplewell says, due to its housing bubble and the subsequent debts choking balance sheets at all levels. There are signals the market its turning that way too, with Spanish yields creeping up toward the psychologically important 7% threshold this week just as Italy’s did in recent weeks.

Of course, there is plenty of apprehension over U.S. issues as well, with next week's looming deadline for Congress' Supercommittee to deliver a sizable deficit reduction plan. Should the group of 12 lawmakers fail in their charge, the ratings agencies are sure to take a hard look at Uncle Sam's credit rating, which already lost its vaunted AAA status at Standard & Poor's in August.

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