NEW YORK – Concerns about potential escalation of sectarian violence in Iraq and the fallout from resurgent crude oil prices may send investors scurrying for the sidelines this week, leaving U.S. stocks vulnerable to a pullback, analysts said.
While the week also will feature some key earnings from companies like No. 2 U.S. home improvement chain Lowe's Cos. Inc. (LOW) and a slew of economic reports, the turmoil in Iraq was expected to move into sharper focus.
Analysts said investors are worried that the violence would spill over to other countries in the Middle East and send crude prices skyrocketing at a time when tension has also been rising over Iran's nuclear plans.
Surging energy costs hurt corporate profits and crimp consumer spending, which accounts for about two-thirds of U.S. economic activity.
"The geopolitical headline risk doesn't look good," said Hans Olsen, chief investment officer at Bingham Legg Advisers in Boston.
"It's like riding in an airplane on a sunny day and hitting a lot of turbulence," he added. "You've got clear skies, but it's really a rough ride."
CRUDE'S JUMP, SAUDI ATTACK
On Friday, U.S. crude for April delivery jumped more than $2 amid Iraq concerns and after a suicide bomb attack at the huge Abqaiq oil facility in Saudi Arabia triggered worries about supply from the world's top crude producer.
On the New York Mercantile Exchange, April crude settled at $62.91 a barrel, up $2.37 for the day.
The Golden Mosque in Samarra, one of Shi'ite Islam's holiest shrines, was destroyed by a dawn bomb attack on Wednesday, setting off bloody sectarian reprisals.
For the past week, the Dow Jones industrial average ended down 0.5 percent as it backtracked from a surge that lifted it to a 4 1/2-year high on Wednesday. But both the Standard & Poor's 500 Index and the Nasdaq Composite Index finished the week up 0.2 percent.
While the spike in crude prices pushed up the stocks of major energy companies like Exxon Mobil Corp. (XOM), they kept a lid on the broader market. Recent top sector plays like the semiconductors have come under pressure, opening the door to more defensive plays involving sectors like health care.
"My sense right now is that we're in a trading range market. I would be looking for a pullback," said Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Montana.
"I don't see any major catalysts that would propel stocks on the upside," he added. "We have nervousness over the situation in Iraq, and I'm frankly concerned about reports out of Saudi Arabia. These are events that would spill over" into the coming week.
TAKING THE PULSE OF HOUSING
Among the economic data set for release this week, the January new home sales report is due on Monday, while on Tuesday, fourth-quarter preliminary GDP and January existing homes sales data will be on tap.
"There's been a great focus as to whether we have a housing bubble and if housing is dying or not," said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey. "Housing in general has been a driving force in the economy. If housing is dying, it's the end of the line for what's driven the economy."
But also paramount on investors' minds will be the outlook for U.S. interest rates. Last week, minutes from the January 31 meeting of the Federal Reserve's policy-setting committee signaled that policy makers believe rates are "near where needed" and any future moves would depend on economic data.
According to economists surveyed by Reuters, new home sales in January are expected to slip to a seasonally adjusted annual rate of 1.260 million units from December's pace of 1.269 million units.
The preliminary report on gross domestic product or GDP, the total output of goods and services within U.S. borders, is expected to show the U.S. economy grew at an annualized rate of 1.6 percent in the fourth quarter, compared with an initial reading of 1.1 percent, according to the Reuters poll.
Existing home sales in January are forecast to hold steady at an annualized pace of 6.60 million units, the poll showed.
Besides Lowe's, other companies scheduled to report earnings this week include ketchup and packaged food maker H.J. Heinz Co. (HNZ), office products retailer Staples Inc. (SPLS), pharmacy benefits manager Medco Health Solutions Inc. (MHS) and utility CenterPoint Energy (CNP).