Bear and Fed set stage for rocky week

By Kristina Cooke

NEW YORK (Reuters) - The rocky ride for the U.S. stock market looked set to intensify this week, as investors worried there could be more victims of the global credit crisis after JPMorgan Chase bailed out Bear Stearns BSC.N.

On Sunday evening, U.S. stock index futures were pointing to a sharply lower open after JPMorgan Chase & Co (JPM.N) bought stricken rival Bear Stearns BSC.N for a rock-bottom price.

In a surprise move, the U.S. Federal Reserve cut the discount rate it charges on direct loans to banks and announced a new program to lend directly to Wall Street dealers.

The new the biggest sign yet of how devastating the credit crisis is for Wall Street, pushed the U.S. dollar to a new record low against the euro and pummeled Asian stock markets early Monday.

U.S. stock indexes futures on Sunday evening were pointing to a sharply lower open on Wall Street on Monday. S&P 500 futures fell 27 points, while Nasdaq futures slid 35.75 points. Dow futures were down 200 points.

"I can't imagine it's going to be a good day in financial markets tomorrow just because of fear -- and not because of any particular knowledge -- but just because of fear of what could be in or what's not in all financial service company balance sheets," said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York on Sunday.

More clarity on how other investment banks weathered the credit market meltdown could come when three major Wall Street firms report their first quarter earnings this week.

Lehman Brothers LEH.N and Goldman Sachs (GS.N) will report earnings on Tuesday, followed by Morgan Stanley (MS.N) on Wednesday. Bear Stearns said on Sunday evening it would no longer be announcing first-quarter earnings on Monday.

On Friday, Lehman's stock was the second-biggest decliner among investment banks, falling 14.6 percent, or $6.73, to close at $39.26 on the New York Stock Exchange.

Forecasts and stock prices have come down sharply for all the big banks, as the credit crunch spreads across almost every market.

FED FOCUS

The Federal Reserve's policy-setting meeting on Tuesday will also be a highlight of the holiday-shortened week. The U.S. stock market will be closed for Good Friday.

U.S. interest-rate futures showed more than a 50 percent chance on Friday that the central bank will cut its benchmark fed funds rate target by 100 basis points this week to revive an economy that many say is already in recession.

"Most of the focus will be on the Federal Reserve. Will the Fed cut rates? And if so, how much? And most importantly, what will the statement that accompanies the decision say?" asked Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York. "Frankly, the Fed said it all in their bailout of Bear Stearns."

Market participants have questioned the effectiveness of the U.S. central bank's efforts. On Tuesday, March 11, the Fed teamed up with other central banks to get up to $200 billion in fresh funds to cash-starved markets. The market rallied sharply for its best day in five years, but most of the gains were gone by the end of the week.