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Investors nervously eye Greece debt talks

Although investors will keep an eye out this week for January retail data and comments on the state of the U.S. economy from a Federal Reserve official, Wall Street is zeroing in on one issue: Greece.

The country's fragile fiscal condition will come to a head on Wednesday, when eurozone officials meet to discuss the bailout plan that has kept Greece afloat in the aftermath of the 2008 financial crisis. Greece's newly elected government, led by Prime Minister Alexis Tsipras, is pushing hard for debt relief, while international and private lenders insist that it adhere to the repayment terms spelled out in the rescue package.

"The 800-pound gorilla in the room right now is Greece -- there's plenty of talk about Ukraine and ISIS, but I can't see an economic wedge from that," said David Kelly, chief market strategist at J.P. Morgan Funds. "Greece is feeling its oats. They feel they have a mandate to abandon austerity, so there is a danger that Greece could effectively go bankrupt and be forced out of the European Union."

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Greece faces a Feb. 28 deadline to renew the bailout. Should negotiations break down, the issue for markets will be whether the political and financial contagion can be minimized.

"The real political issue is if it's not clean," Kelly said. "The truth is that Europe is interconnected financially, and there's a heavy price on an actual Greek default. If Greece defaults and goes back into a Great Depression, that will act to scare people in other peripheral countries. It could also make them angry at Germany."

"The most positive outcome would be some recognition by central European countries that it makes sense to be a little kinder to Greece, and others," he added, referring to Spain, Italy and Portugal.

"A lot of the day-to-day volatility revolves around the negotiations between the [European Union], European Central Bank and Greece, and those headlines have been nothing short of confrontational. We think everybody loses should no settlement be negotiated," said Jim Russell, portfolio manager at investment firm Bahl & Gaynor.

While Russell believes a Greek default and exit from the EU would be less disruptive to global markets than it would have two or three years ago, it would set a precedent for other countries to pursue.

That said, it's a Catch-22 scenario, he noted. Should Greece succeed in getting a modification of their loan terms, "others may line up, so there is the predicament," Russell said.

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Wall Street will also have domestic concerns on its radar, with Dallas Federal Reserve President Richard Fisher scheduled to speak on monetary policy in New York on Wednesday, and then on his 10 years at the Fed in San Antonio.

While no longer a voting member of the Federal Open Market Committee, Fisher's comments could draw more than the usual attention after Friday's strong monthly payrolls report. Many economists say the jump in job growth in recent months is a cue for the Fed to begin normalizing monetary policy sooner rather than later.

A noted hawk who favors the Fed raising its benchmark interest rate from historic lows, Fisher's words will add to the market speculation over whether the Fed will start raising rates later this year, as most analysts expect, or hold off given the uncertain global economy.

On Thursday, January retail sales will shed light on whether the decline in gasoline prices translates into the increased consumer spending that many market watchers have been banking on.

"Everybody is anxious to see savings at the gas pump filter into the real economy," Russell said.

"Retail sales matter -- should gasoline prices really not result in the consumer-driven demand lift, then we're at a loss as to where earnings support would come from," said Russell, who adds that the drop in energy costs has been sharp enough and lasted long enough to start showing up in the month data.

In December, excluding autos and gasoline sales, retail sales fell 0.3 percent after advancing 0.6 percent in November.

"With gasoline stripped out we should see some forward movement here," Russell said, noting the consensus forecast calling for a 0.4 percent gain in sales, excluding autos and gas, in January's number.

Still, thoughts about the Fed and the domestic economy will take a backseat to the game of chicken seemingly being played between Greece and its European partners. How that plays out could ultimately give direction to a U.S. stock market that has been exceedingly volatile while basically standing even with where it ended 2014.

"A sloppy Greek exit will trump anything else that this market sees," said Art Hogan, chief market strategist at Wunderlich Securities.