Stock futures tread water but fear over Europe remains

NEW YORK (Reuters) - Stock index futures were flat on Monday after a steep drop in the previous session that erased the Dow industrials' gain for the year, and analysts said there may be more declines now that indexes have fallen below key technical support levels.

Signs of economic weakness around the globe and Europe's intensifying debt crisis are unnerving investors, who have been piling out of riskier investments like commodities and equities for the perceived safety of higher-rated government bonds.

Banking stocks are heading into a bear market as Europe's debt crisis pressures the sector. The KBW Bank index <.BKX>, which measures the performance of 24 banks, is down 16 percent from a peak in March.

Morgan Stanley has come under pressure as bond markets treat the bank as a junk-rated company, and the higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade. The bank's stock is off 40 percent since late March.

"It is a very nervous market, and it will continue," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. "It's basically the same fear factor that has been in the market over Europe and of course the (U.S. May) employment data."

S&P 500 futures rose 4 points and were just above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures dropped 2 points, and Nasdaq 100 futures rose 6 points.

Cardillo said he was watching 1,275 as a support level on the S&P 500 after the index broke through its 200-day moving average on Friday following the worse decline for the index in 7 months.

"If we close under that tonight, then the market is headed lower in the short-term, possibly by 3 or 4 percent," he said.

In a potential boost for markets looking for measures to end the debt crisis, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro-area finances, and major new powers for the European Commission, European Parliament and European Court of Justice.

European shares traded flat on Monday after opening lower in the wake of grim economic data across the globe last week. The FTSE Euro First300 index <.FTEU3> fell 0.04 percent.

Japan's shares fell sharply on Monday, with the broader Topix <.TOPX> index hitting a 28-year low as investors reacted to the disappointing Friday jobs data.

"While we are not down 20 percent and in official bear market territory, we believe that we have entered a bear market," wrote Wayne Kaufman, chief market analyst at John Thomas Financial in a note on Monday.

"Equities have not responded to oversold conditions or to very attractive valuations versus bonds, and we must take that as a warning," he said.

The Commerce Department releases April factory orders at 10 a.m. EDT (1400 GMT). Economists in a Reuters survey expect a rise of 0.2 percent compared with a 1.9 percent drop in the prior month.

A trial of Johnson & Johnson's Zytiga in certain prostate cancer patients showed that it doubled the amount of time they lived without the disease getting worse, potentially offering new hope for patients who see their cancer return.

An experimental Bristol-Myers Squibb drug helped shrink tumors in patients with advanced melanoma, kidney and lung cancers in a preliminary trial, raising hopes for yet another drug that can wake up the immune system and train it to attack cancer cells. The stock rose 2.7 percent in premarket trade.

Ford Motor Co is in talks with local partners to introduce indigenous brands in China as it plays catch-up in the world's biggest auto market with the likes of General Motors Co and Volkswagen , its China chief said on Monday.

(Editing by Padraic Cassidy)

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