The release of Fed's minutes last Wednesday took Wall Street on a wild ride, with major averages ending mixed. The Dow Jones Industrials (NYSEARCA:DIA) gained 0.13% for the week. The S&P500 (NYSEARCA:SPY) lost 0.32%, while Tech-heavy NASDAQ (NASDAQ:QQQ) lost 1.25%, dragged down by Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Priceline.com (NASDAQ:PCLN). Google managed to move in the opposite direction this time around.
After a sharp drop on Wednesday, U.S. Treasuries finished the week almost flat. Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) gained 0.40% for the week. Gold and silver continued their descent from the previous week, with SPDR Gold Shares (NYSEARCA:GLD) losing 2.2% and iShares Silver Trust (NYSEARCA:SLV) 4.2% for the week.
Wall Street will face four challenges:
The first challenge is Moody's U.K. downgrade. Moody's cut Britain's rating by one notch to Aa1 from Aaa with a stable outlook Friday night (Eastern time), citing the prospect of a further slow-down for Britain's economy in the near future, which will undermine the government's deficit reduction plans.
Though expected, Moody's downgrade is certainly a no confidence vote to the country's ongoing austerity policies that have worsened its fiscal situation. But there are two things of concern: First, a rise in U.K. interest rates and a stronger dollar- the sterling fell to around $1.5160 after the announcement from about $1.5240, just off Thursday's fresh 2-1/2-year low.
Second, the revival of sovereign debt fears that have been buried under several rounds of QE around the world, a headwind for financials that have been driving the recent recovery. Nevertheless, a Financial Select Sector SPDR (NYSEARCA:XLF) and Direction Daily Financial Bull ETFs remained flat in after hours.
As for precious metals, the impact may be mixed: A stronger dollar is bearish, while the revival of sovereign debt risk is bullish for precious metals. That can explain why gold recovered in after hours trade, but didn't rally. Gold and Silver ETFs like SPDR Gold Shares and iShares Silver Trust showed little movement in after hours.
The second challenge will be the Italian elections. Any surprise here could re-ignite sovereign debt issues in Europe.
The third challenge is Ben Bernanke's two-day testimony before Congress that begins on Tuesday. Wall Street will be looking for clarifications of the Fed minutes. Most notably, whether the Fed will seek an exit from QE before the economy reaches the magic number of the natural rate of unemployment.
The fourth challenge will be Apple's shareholder meeting on Wednesday. Any pleasant surprise here, e.g., a boost in dividend or a new product announcement could light up the high-tech sector.
The fifth challenge will come from earnings from major retailers, including Macy's (NYSE:M), J. C. Penney (NYSE:JCP), Target (NYSE:TGT), and Limited Brands. Again, any major surprise here could unsettle the entire retailing sector.