Eurozone worries weigh

Gains could be hard to get on the Toronto stock market this week as worries about how European leaders can craft a watertight mechanism for dealing with the crippling debt crisis threaten to distract investors from decent economic data and a successful earnings season.

TORONTO — Gains could be hard to get on the Toronto stock market this week as worries about how European leaders can craft a watertight mechanism for dealing with the crippling debt crisis threaten to distract investors from decent economic data and a successful earnings season.

“We’re in a very difficult environment,” said John Johnston, chief strategist at Davis Rea Ltd.

“And I think it just means volatility in the very near term until a greater degree of clarity appears in Europe.”

It is also an ultra-light week for economic data, which means markets will likely be sensitive to headline driven developments.

Markets finished lower last week at the end of a roller coaster string of sessions after Greek prime minister George Papandreou horrified financial markets and other members of the eurozone with his announcement that a referendum would be held to approve a bailout package that had been hammered together just a few days earlier.

The prospect of the referendum being heavily defeated raised the prospect of a messy Greek default on its debts, which in turn would spell big trouble for the region’s banks which hold Greek bonds and even derail a fragile recovery and push global economies back into recession.

This scenario would spell bad news for the resource heavy Toronto market because slowing conditions would slash prices for commodities such as oil and copper and in turn punish resource stocks.

The S&P/TSX composite index ended the week down 0.88 per cent and the Dow industrials lost 2.02 per cent while Papandreou was forced to shelve the referendum plans.

But even before Papandreou dropped his bombshell, markets were already stepping back from the big gains racked up after Eurozone leaders had announced a three-pronged attack on the debt crisis.

The deal requires banks to take 50 per cent losses on Greece’s bonds.

The continent’s banks will be strengthened, partially so they can sustain deeper losses on Greek bonds.

The deal also calls for a reinforcement of a European bailout fund so it can serve as a C1-trillion firewall to prevent larger economies such as Italy and Spain from being dragged into the crisis.

But enthusiasm was evaporating over a lack of details on how the plan will work, in particular how the stability fund can be more than doubled from its current size.

“Given how quick things can change there, it means the details are going to stay sketchy because people aren’t going to pony up money to help them,” added Johnston.

Market attention has also been shifting to Italy. Confidence in the country’s ability to reduce its public debt and spur growth in its anemic economy has withered over recent weeks as the government weakened and this has shown up in Italy paying traders greater amounts of money to buy its bonds.

On Friday, Italy’s benchmark 10-year bond yield jumped 0.32 of a percentage point to 6.43 per cent, indicating a surge in investor worries about the country’s ability to repay its debts.

“The markets are saying Italy is the next major concern,” said Phillip Petursson, director of institutional equities at Manulife Global Investment Management.

He noted that spreads over German bunds now amount to about 4.55 per cent — “a very wide spread.”

Meanwhile, it is another heavy earnings reporting week for corporate Canada.

“Overall, the earnings season has been better than expected,” said Colin Cieszynski, market analyst at CMC Canada.

“Resource numbers have been good, some of the oil and gas reports have been spectacular,” referring to strong reports last week from Suncor Energy (TSX:SU) and Canadian Natural Resources (TSX:CNQ).

However, strong earnings from the U.S. and Canada haven’t been enough to push markets higher because of the fixation on Europe.

Positive economic data has also failed to move markets much. Markets were lower on Friday after the U.S. government said 80,000 jobs were created last month, which was close to expectations. And the unemployment rate fell to 9 per cent from 9.1 per cent, the first decline since July.

“What we see in the U.S. is an economy that’s not in recession, it continues to grow but very slowly, it’s not reaccelerating, it’s probably still too close to recession for comfort,” said Johnston.

Among other companies, investors take in results from uranium miners Cameco Inc. (TSX:CCO) and Uranium One (TSX:UUU)on Monday, First Quantum Minerals (TSX:FM) and CI Financial Corp. (TSX:CIX) Tuesday while diary giant Saputo Inc. (TSX:SAP) Iamgold (TSX:IMG) report on Wednesday.

Investors hear from paper company Cascades Inc. (TSX:CAS), coffee and doughnut icon Tim Horton’s (TSX:THI) and miners Quadra FNX (TSX:QUX) and Taseko Mines (TSX:TKO) on Thursday.

Looking beyond this week, analysts say markets are in for tough slogging for awhile yet. And it all comes down to debt.

“Debt is the bogeyman, it’s the big four letter word overriding the entire Western world right now,” said Johnston.

“The Western democracies are burdened with huge amounts of debt in the government sector, the financial sector and the household sector and it tells me the next decade is going to be a period of deleveraging and it’s going to be tough.”

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