Banks, Fed, earnings, flu in view

By Ellis Mnyandu

NEW YORK (Reuters) - U.S. stocks may run into some turbulence this week as the impending release of bank "stress test" results, a Federal Reserve meeting and a flood of earnings give investors reasons for caution.

Fears of a global swine flu pandemic developed into another factor to watch over the weekend with new infections in the United States and Canada discovered on Sunday, and as millions of Mexicans hid indoors to avoid a virus that has already killed up to 81 people.

But investors said that as this point, news on the state of the financial system and earnings would drive sentiment and that information about the illness was too sparse to influence the New York open on Monday. News of the flu spreading, however, could weigh on the market as the week progresses.

While investors have been heartened by a recent flurry of surprisingly upbeat earnings and economic data, strategists said there was still concern about whether the government has done enough to shore up the banking sector.

Besides fretting about bank stress tests, investors will deal with a raft of economic indicators this week. The data menu includes February home prices, April consumer confidence, weekly jobless claims and an advance report on first-quarter real Gross Domestic Product.

The Federal Reserve will be in the spotlight as the central bank's policy-making panel is set to hold a two-day meeting beginning on Tuesday. The policy statement is scheduled for release at 2:15 p.m. (1815 GMT) on Wednesday.

"People are looking for positive news out of the stress tests, saying that the banking system is now OK," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com in Shrewsbury, New Jersey. "I think there could be some rockiness" this week.

DOWN AND OUT IN BEVERLY HILLS

Stabilizing the banking sector is seen as one of many crucial steps to get the economy on the road to recovery.

So far this year, federal regulators have closed 29 banks, including four that failed on Friday night, plus one credit union. First Bank of Beverly Hills, in Calabasas, California, was one of the four shuttered banks; it had $1.5 billion in assets and just $1 billion in deposits.

Piles of bad loans, many made to subprime borrowers during the housing boom, have forced some banks into insolvency after the credit crisis began in the summer of 2007. Banks' balance sheets deteriorated with the sharp slowdown in the housing market as mortgage delinquencies and foreclosures soared along with unemployment.

Worries about the banking sector's health helped push the market to 12-year closing lows on March 9. Since then, the benchmark Standard & Poor's 500 .SPX has gained 28 percent.

Last week, the Dow Jones industrial average .DJI fell 0.7 percent and the S&P 500 shed 0.4 percent, causing both to break a six-week winning streak. In contrast, the Nasdaq .IXIC rose 1.3 percent and scored its straight weekly advance, rising 1.3 percent.

The Obama administration is due to publicly release the bank stress test results on May 4, a week from Monday. But there are fears that some of the news could start trickling out this week, which raises the specter of more volatility in the stock market.

"One thing investors should expect right now is at least further volatility in the financial sector until the stress test results come out on May 4," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.