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One of Wall Street's oldest maxims will be put to the test this week: markets don't hit bottom on a Friday.
Stocks closed out their worst week in more than three months on fears that trouble at two Bear Stearns hedge funds may signal bigger problems ahead for credit markets.
Whether investors worry through the weekend and remain in a selling mood on Monday remains to be seen after the main stock indexes all fell by more than 1 per cent on Friday.
The week ahead brings no shortage of other events to test investors' nerves, with the foremost being a two-day Federal Reserve meeting on interest rates. Data on inflation and home sales are also on the slate.
For the stock market, a rise in bond yields has stalled a long-running rally. Some are worried that two troubled hedge funds managed by Bear Stearns may be only the tip of the iceberg.
The hedge funds held subprime mortgages, a risky segment of the credit market that has been pummelled by rising defaults. Subprime borrowers are less creditworthy than other borrowers.
For the week, the Dow Jones industrial average fell 2 per cent, the Standard & Poor's 500 index declined 2.0 per cent and the Nasdaq Composite Index retreated 1.4 per cent.
"People are concerned that this is a contagion that could spread elsewhere," said Stephen Massocca, co-chief executive at San Francisco-based investment bank Pacific Growth Equities. "What's been troubling the Dow is bond yields going up."
The yield on the benchmark 10-year Treasury note has been approaching the 5.25 per cent level. Higher interest rates lead to higher borrowing costs that can slow the economy.
The week's economic data includes existing home sales tomorrow (NZ time) and new home sales on Wednesday.
A month ago, an eye-popping 16 per cent rise in new home sales for April relieved some concerns about the state of the housing sector. For May, a Reuters poll showed economists expect new home sales to come in at an annual rate of 925,000 units, which would be a decline from the 981,000 rate in April.
According to the median forecast in the poll, the pace of existing home sales is seen falling slightly to a 5.98 million annual unit rate after 5.99 million in April.
On Wednesday, the Conference Board, a private research firm, reports on its survey of consumer attitudes in June. The closely watched index of consumer sentiment is expected to decline to 105.5 from 108.0 in May.
On Thursday, the Commerce Department reports on durable goods orders for May.
- REUTERS