Fannie and Freddie, data to rule stocks

Traders work on the floor at the New York Stock Exchange, June 26, 2008. (REUTERS/Brendan McDermid)

NEW YORK (Reuters) - This week is almost sure to be another rocky ride for the U.S. stock market.

The week kicked off on Sunday when the United States announced bold measures to support Fannie Mae <FNM.N> and Freddie Mac <FRE.N>, government-sponsored home finance companies that own or guarantee about one in two mortgages in the United States. Fannie and Freddie's shares were hammered last week amid mounting fears of capital constraints and played a major role in the market's weekly decline.

The Treasury and Federal Reserve unveiled sweeping steps to shore up the troubled mortgage financing giants if need be and head off a potential meltdown in global financial markets.

The Fed said the companies could access its discount window for emergency cash. The Treasury separately said that it would temporarily increase its line of credit to the two, as well as purchase equity in them, if needed.

The move by the Fed echoed its emergency action to help rescue investment bank Bear Stearns in March, when it opened the discount window emergency lending facility to investment banks for the first time since the Great Depression.

"This action over the weekend by the Fed and other government agencies shows that the government is trying to shore up not only the financial system but to create confidence in the U.S. equity market," said Scott Fullman, director of derivative investment strategy at WJB Capital Group in New York.

"The question now is whether the confidence can be sustained and if there are more skeletons in the closet."

Apart from Fannie and Freddie, Wall Street will also focus on Federal Reserve Chairman Ben Bernanke this week, when he is scheduled to appear twice on Capitol Hill to give his semiannual testimony on monetary policy. He is set to testify on Tuesday before the U.S. Senate Banking Committee, and on Wednesday before the U.S. House Financial Services Committee.

Investors will latch on to anything Bernanke says about the U.S. economy, inflation and interest rates.

"The bottom line is that we're in the middle of a financial tsunami. This is a storm the likes of which this country hasn't seen," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "The market right now needs to see results. It no longer gives anyone the benefit of the doubt."

Fannie Mae and Freddie Mac, which own or guarantee almost $5 trillion in mortgages and package them into bonds, face mounting losses from loan delinquencies and foreclosures. Investors feared last week that if they were hampered from doing business, the paralysis would worsen the housing crisis.

This week also brings a torrent of numbers from earnings reports and economic indicators. It will be one of the busiest weeks for quarterly earnings, with reports from Dow component Citigroup <C.N>, the No. 1 U.S. bank, and technology bellwether Google <GOOG.O>, the leading Web search company.

Making the terrain even more treacherous for stock investors are worries about oil and inflation. On Friday, oil shot up to a record above $147 a barrel. This week, investors will scrutinize data on consumer and producer prices for signs of rising inflationary pressures.

Major economic reports on tap include the U.S. Producer Price Index and the Consumer Price Index, industrial production and capacity utilization, and housing starts.

"I have my helmet on and my body armor on," said Frederic Dickson, senior vice president and market strategist at D.A. Davidson & Co in Lake Oswego, Oregon. "We expect it to be another volatile week with the market reacting to a triple play of earnings, oil and the mortgage agencies.

"The market is going to remain nervous, watching developments with oil and tensions in the Middle East, and the avalanche of earnings and outlooks that will really start to hit the tape with banks and tech companies (this) week."

OIL, PPI AND CPI

Political tensions over Iran's nuclear work and oil supply worries drove crude prices to yet another all-time high last week.

August crude gained $3.43, or 2.4 percent, to settle on Friday at $145.08 a barrel on the New York Mercantile Exchange. Earlier, it hit an intraday record of $147.27, eclipsing the previous NYMEX high of $145.85 set on July 3, the day before the U.S. Independence Day holiday.

The government's report on the Producer Price Index for June is set for Tuesday, followed by June CPI on Wednesday, when the Federal Reserve also is expected to release the minutes from its most recent policy-making meeting on June 24-25. At that meeting, the Fed held its benchmark fed funds rate for overnight bank lending at 2 percent.

FANNIE AND FREDDIE FALLOUT

Concerns about Fannie Mae and Freddie Mac's stability drove Friday's sharp sell-off, marking the sixth straight weekly drop for both the Nasdaq and the Standard & Poor's 500 Index -- their longest weekly losing streaks since 2004.

Earlier last week, the S&P 500 entered its first bear market since 2002. It joined the Dow and the Nasdaq, which had already slid 20 percent or more from their most recent closing highs, set last October.

During Friday's roller-coaster session, the Dow dropped below the 11,000 level for the first time since July 2006.

For the week, the Dow Jones industrial average <.DJI> lost 1.4 percent and booked its fourth straight weekly decline.

The Nasdaq Composite Index <.IXIC> slipped 0.3 percent for the week, while the S&P 500 <.SPX> slid 1.9 percent.

EARNINGS AND MORE FROM THE FED

In addition to quarterly report cards from Citigroup and Google, this week's earnings to watch include chipmaker Intel Corp <INTC.O> and Microsoft Corp <MSFT.O>. This barrage of quarterly numbers and companies' comments on what they expect for the rest of the year are likely to make stock trading extremely choppy.

Friday's session, marked by a spike and a pullback in the Chicago Board Options Exchange Volatility Index, illustrated just how jumpy the stock market has become. The VIX <.VIX>, which is Wall Street's barometer of fear, shot up 15 percent in midday trading to 29.44, its highest since March 20. By the close, the VIX was higher, but more subdued. It ended at 27.49, up 7.42 percent.

Besides Bernanke, the week's agenda includes appearances by two other Fed officials: Janet Yellen, the president of the Federal Reserve Bank of San Francisco, is scheduled to speak on the housing market on Tuesday in Hollywood, California. Thomas Hoenig, the president of the Kansas City Fed, is set to speak on monetary policy and the economic outlook on Wednesday in Durango, Colorado.

(Additional reporting by Kristina Cooke and Doris Frankel; Editing by Jan Paschal)