Profits to set trading tone
Earnings reports from the Canadian resource sector will help set the tone for trading on the Toronto stock market amid a very light week for economic news in Canada and the U.S.
Expectations are muted for the resource sector, reflecting a lacklustre global economic recovery that has not been kind to energy and mining stocks.
“I think there’s no reason why you need to be aggressive owners of any of the big energy names. I think you could see the same thing for gold too, more so probably for gold than energy,” said John Stephenson, portfolio manager at First Asset Funds Inc.
The TSX finished last week little changed, up a slight 0.25 per cent to preserve a solid gain during January that saw the market rise by two per cent. New York indexes have also largely moved sideways since racking up a strong advance last month where the Dow industrials ran ahead about six per cent.
In the energy sector, traders will take in earnings from Cenovus Energy (TSX:CVE) on Thursday.
Cenovus is expected to suffer from the same malady affecting other big oil companies: a huge price differential between Western Canadian Select crude from the oilsands and West Texas Intermediate, a U.S. light oil benchmark priced at Cushing, Okla.
Heavy crude, like that produced in the oilsands, has historically traded at a discount to WTI. But recently, that price gap has at times widened to roughly $40 as pipeline bottlenecks prevent growing oilsands production from getting to the most lucrative markets.
“I think in time obviously this will improve, I think this pricing differential will close as it is temporary in nature and because of many temporary factors,” added Stephenson.
“But it’s not shaping up to be pretty.”
Analysts expect Cenovus to post net earnings per share of 39 cents, up four cents from a year ago. Revenue is forecast at $4.366 billion.
Talisman Energy (TSX:TLM) and gas producer EnCana (TSX:ECA) also report results this week.
Canada’s biggest gold producer also reports earnings on Thursday. Barrick Gold (TSX:ABX) is expected to report adjusted earnings per share of US$1.04, down from $1.17 a year ago, reflecting problems across the whole sector.
“It’s cost, cost, cost and cost — it is the only issue,” added Stephenson.
“What are the big costs? Energy and labour. And those are going higher. Not to mention royalties, and other things but costs are going higher and I think the other thing gold companies have to confront is that the investment community is overwhelmingly bearish on gold companies.”
Traders will also hear from Agnico-Eagle Mines (TSX:AEM) and Kinross Gold (TSX:K) this week.
Pipeline company TransCanada will hand in results on Tuesday. The company is trying to get approval from U.S. authorities to build its Keystone XL pipeline, a huge undertaking that would ship oilsands crude from Hardisty, Alberta to the U.S. gulf coast.
But the project has been the target of fierce opposition from environmental groups and TransCanada has had to redraw the proposed route of the pipeline across Nebraska to avoid the sensitive Sandhills region of the state.
Stephenson doesn’t think the delay in getting approval will impact TransCanada’s earnings report.
“I think their earnings are going to be fine,” he said.
“I think they’re actually a good story and I’m in the bullish camp that says Keystone XL gets done eventually. It will be delayed and delayed but it will get done eventually because there’s really no good reason not to do it.”
Analysts expect net profit of 51 cents per share, down slightly from 53 cents a year ago.
Outside of the resource sector, traders will also take in earnings from insurer Sun Life Financial (TSX:SLF) on Wednesday and telecoms Rogers Communications (TSX:RCI.B) and Telus Corp. (TSX:T) on Friday.
In the meantime, seasonal factors could also provide some lift to the TSX this week.
“One of the interesting features of the rally is that we’re in a seasonal period, you have a lot of contributions coming into RRSPs in Canada and the individual retirement accounts in the U.S. and also you have a seasonal flow of money going into personal pension plans,” observed Norman Raschkowan, North American strategist at Mackenzie Financial Corp.
“The real test will be whether the upward trend is sustained beyond the first quarter or whether we have repeat of the pattern seen in the past couple of years where you have a strong first quarter and then go into doldrums. And then everyone realizes things aren’t that bad and prices are cheap and markets sort of rally into year end.”