By Kristina Cooke (The Guardian)

The rocky ride for the U.S. stock market is likely to intensify this week with investors focusing on a deal to save one of the biggest investment banks while regulators rapidly burn through options to limit more damage to the financial system.

All eyes will again be on Bear Stearns Cos after news on Sunday that the fifth-largest U.S. investment bank was close to selling itself to JPMorgan Chase & Co.

On Friday the Federal Reserve and JPMorgan stepped in to rescue Bear Stearns with emergency funding as fallout from the global credit crisis took its toll on the brokerage's cash position.

Bear was hoping to announce a deal before the open of Asian markets, the Wall Street Journal said on Sunday.

News of the imminent announcement did not stop U.S. stock indexes futures from opening the week lower Sunday evening in New York. S&P 500 futures pointed to a lower U.S. stock market open on Monday, falling 7 points, or 0.5 percent, while Nasdaq futures were down 7.0 point also at 1717.

The U.S. dollar also breached a new low of $1.57 against the euro in early Monday morning Asian trading.

"It will be a logical outcome if the (U.S.) market kept panicking over fears of who is next," said Chip Hanlon, president Delta Global Advisors, Inc. in Huntington Beach, California on Sunday.

Beyond Bear Stearns the focus will be on how investment banks weathered the credit market meltdown in their first quarter when four major Wall Street firms report earnings this week. Bear Stearns will report its results on Monday.

Bear Stearns is first out of the block on Monday. Bear moved up its earnings release, which was initially scheduled for Thursday. Lehman Brothers and Goldman Sachs will report earnings on Tuesday, followed by Morgan Stanley on Wednesday.

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.

Then on Friday, Bear Stearns said a cash crunch forced it to turn to the Federal Reserve and JPMorgan Chase for emergency funds, before news late Sunday that JPMorgan Chase & Co is close to rescuing the fifth-largest U.S. investment bank.

S&P SKATES CLOSE TO THE BEAR

For US stocks broadly, the S&P500 index was close to falling into a bear market last week. If it drops further this week, it could cross a threshold that normally indicates a bear market, a drop of 20 percent from its October closing high. The Nasdaq turned bearish last month.

The Dow Jones industrial average fell 194.65 points, or 1.60 percent, to end on Friday at 11,951.09, with only one of the 30 Dow components, Boeing Co., finishing higher. The Standard & Poor's 500 index fell 27.34 points, or 2.08 percent, to 1,288.14, and the Nasdaq Composite Index lost 51.12 points, or 2.26 percent, to close at 2,212.49.

For the week, the Dow industrials gained 0.48 percent though, thanks to Tuesday's huge rally, but the Standard & Poor's 500 index slipped 0.40 percent and the Nasdaq was unchanged.

For the year, the Dow is down 9.90 percent, the S&P 500 is off 12.27 percent and the Nasdaq has lost 16.58 percent.

PPI, HOUSING AND RECESSION

Among the coming week's key economic data will be the U.S. Producer Price Index on Tuesday, with investors concerned about rising inflation even as the economy slows. Economists polled by Reuters expect February core PPI, excluding volatile food and energy prices, to rise 0.2 percent. In January, core PPI gained 0.4 percent.

On Friday, a government report unexpectedly showed February's Consumer Price Index, another top inflation gauge, was unchanged. While that leaves more room for the Federal Reserve to cut interest rates, analysts were skeptical about the tame inflation picture painted by the data because prices of oil, gold and other commodities recently hit record highs.

Wall Street will get some other economic data this week that could give more clues about the U.S. economy's health, with industrial production and capacity utilization due Monday and February housing starts set for Tuesday.

Weekly jobless claims and a March index of regional business activity from the Federal Reserve Bank of Philadelphia will round out the economic week on Thursday.

Wall Street will have one thing in mind as it watches the week's stream of numbers, Johnson said.