By Sue Chang, MarketWatch

Deutsche Bank crisis could take months to resolve

It promises to be a wild week for investors with a lot of moving parts as economic data, politics, and Deutsche Bank worries all converge in a volatile mix in the stock market.

"It's a huge data week and investors will be watching closely to see if this month is better than last month," said Phil Orlando, chief equity market strategist at Federated investors.

A string of key economic indicators are on tap for release including the ISM, auto sales for September, ISM nonmanufacturing data, weekly jobless claims, and nonfarm payrolls.

Softer data in recent weeks led the Federal Reserve to keep interest rates unchanged at its September meeting and as such, market participants will be anxious to decipher the latest signals from the economic sector.

The ISM's manufacturing index fell to 49.4% in September from 52.6% in August, turning negative for the first time since February. Meanwhile, the U.S. added 151,000 jobs (http://www.marketwatch.com/story/us-creates-151000-jobs-in-august-unemployment-49-2016-09-02) in August, falling short of the 170,000 projected by economists in a MarketWatch survey.

Politics is also likely to keep investors on their toes, if not entertained, as Democrat Tim Kaine faces off against his Republican rival Mike Pence in the vice presidential debate on Tuesday.

"If they follow last week's tilt towards [Hillary] Clinton, then next week's debate would assure the bulls that you have a friend in stability," said Richard Hastings, macro strategist at Seaport Global Securities LLC.

The election itself is expected to take a toll on the economy and the markets, according to Michelle Meyer, U.S. economist at Bank of America Merrill Lynch.

"Regardless of the outcome of the election, we think the economy is at risk of a soft patch in the coming months as a result of the uncertainty related to the election," she said in a report.

Meanwhile, worries about Deutsche Bank, and by extension European banks, are likely to continue weighing on sentiment until the German lender reaches a settlement with the Justice Department over its packaging of mortgage-backed securities in the run-up to the 2008 financial crisis.

"Real issues will take months to fully resolve. In the interim, European bank prices will probably be determined by the big global hedge funds and fast money traders," Matthew Peterson, chief wealth strategist at LPL Financial, said in a note. "Many of these traders have taken bets against European banks, but some have also been buying them, hoping for a recovery."

The longer it takes Deutsche Bank (DBK.XE) to reach a deal with the Justice Department, the more bank stocks are likely to be roiled as they "stop reflecting fundamental value and effectively become vehicles for short term traders," he said.

U.S.-listed Deutsche Bank rallied 14% on Friday following a report that the bank is close to a $5.4 billion settlement (http://www.marketwatch.com/story/deutsche-bank-us-shares-surge-13-on-speculation-of-lower-doj-settlement-2016-09-30), which would be much less damaging than the $14 billion initially proposed by the U.S. government. But the stock has been in a steady decline since late last year as the bank reels from a series of missteps as the chart below illustrates.

Corporate news will play a minor role with only a handful of S&P 500 companies reporting before quarterly earnings pick up in earnest later in October. Micron Technology Inc. (MU), Constellation Brands Inc. (STZ), and Monsanto Co. (MON) are some of the notable names slated to release quarterly results next week.

As it stands, the scoreboard for earnings remains dismal. So far in the third quarter, earnings have dropped an average 2.1%, said John Butters, senior earnings analyst at FactSet.

"If the index reports a decline in earnings for third quarter, it will mark the first time the index has recorded six consecutive quarters of year-over-year declines in earnings since FactSet began tracking the data in third quarter 2008," Butters said.

Analysts have blamed weak corporate profit, along with political uncertainty, as a major obstacle preventing the market from breaking out higher.

"Given all the concerns--the economy decelerating sharply, an earnings recession, uncertainty from politics, oil prices and currencies--the market should be off 5% to 10%," said Orlando who believes investors may be too complacent about the risks.

Complacency aside, stocks have history on their side next month. In the past 20 years, October had the highest average return for a single month at 2.1%, LPL Financial data show.

The S&P 500 rose 17.14 points, or 0.8%, to close at 2,168.27 on Friday although the index was down 0.1% in September. The Dow Jones Industrial Average gained 164.70 points, or 0.9%, to finish at 18,308.15 but fell 0.8% for the month. The Nasdaq Composite climbed 42.85 points, or 0.8%, to close at 5,312.00, adding 1.7% in September.

(END) Dow Jones Newswires

October 01, 2016 08:01 ET (12:01 GMT)