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Markets end strong week under cloud of pessimism

By Walter Hamilton, Los Angeles Times –

LOS ANGELES — The stock market finished its best week of the year, but the mood on Wall Street was subdued as investors braced for potentially major developments in Europe beginning Monday.

Major stock indexes extended an unexpected four-day winning streak with modest gains Friday.

The Dow Jones industrial average rose more than 93 points, notching a 3.6 percent weekly gain that reversed a 9 percent decline over the previous month. The blue chip index is now up 2.7 percent since Jan. 1 after sagging into negative territory for the year last week.

The broader Standard & Poor’s 500 index rose 3.7 percent this past week and is up 5.4 percent this year. It had fallen nearly 10 percent over the previous two months.

The market’s performance at least temporarily halted talk of a prolonged correction, which had cropped up as stocks fell amid signs of slowing U.S. growth. But few investors expect the recent uptick to turn into much.

“I don’t think we’re out of the woods on the correction yet,” said Allen Sinai, head of Decision Economics Inc. in New York.

Investors remain wary about the accelerating woes of Europe. The immediate concern surrounds the fate of Spanish banks in advance of a critical vote in Greece that is likely to determine whether that nation remains part of the 17-nation common currency.

“Next week is very, very important,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. “Europe has to be prepared, and you can tell they’re readying themselves for the Greek vote to go in the wrong direction.”

Stocks moved higher partly on hope that European officials would work out a joint agreement to recapitalize Spain’s banking sector, which has been weighed down by billions of dollars of soured mortgage debt. Investors also remain hopeful that central banks stand at the ready to prop up the global economy if Europe begins to slip.

Yields on Spanish government bonds have risen sharply in the last two weeks, making it too costly for Spain itself to rescue its financial institutions. Fitch Ratings downgraded Spain’s credit rating by three notches Thursday, predicting the bailout could cost $125 billion.

President Barack Obama urged European policymakers Friday to take stronger actions to help Spanish banks and resuscitate their ailing economies.

Investors expect European policymakers to forge an agreement on the banks, despite the reluctance of Germany to participate in a pan-European effort. Lawmakers are expected to take part in a conference call Saturday that is considered the first step toward concrete action.

“If we come into work on Monday and the Spanish telephone conference call was a miserable failure and Spanish bond yields are higher, then there could be a significant sell-off in the market,” said David Dietze, of Point View Wealth Management. Progress toward an agreement, however, could spark a rally, he said.

European leaders need to shore up Spanish banks quickly in advance of the Greek vote that could be a turning point in Europe’s debt crisis, analysts say.

The Greek citizenry is chafing at austerity measures that were demanded by its neighbors in exchange for a series of bailouts that have kept Greece solvent.

If Greece’s anti-austerity Syriza party wins and moves to renege on the bailout terms, it could precipitate Greece’s withdrawal from the euro, dealing a potentially severe blow to the common currency itself.

“The idea is to avoid a contagion,” said James Glassman, an economist at JPMorgan Chase & Co. in New York. “And then we get the Greek election and then we’re back to Square One.”

Europe’s troubles are unlikely to cause major damage to the U.S. economy but are expected to restrain the stock market until the outcomes in Spain and Greece are clearer, analysts say.

“You’re not going to get this big lift,” said Robert Bissell, president of Wells Capital Management in Los Angeles. But “I don’t think you’re going to get a big crash.”

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