TORONTO — Traders on the Toronto stock market will likely start this week in a positive frame of mind amid relief that European countries at last appear serious about fixing the region’s debt crisis.
“We’re looking at an area where until the middle of next week the market conditions are very good,” said Andrew Pyle, investment adviser with ScotiaMcLeod in Peterborough, Ont.
Share prices could be under pressure in the last half of the week, depending on what the U.S. Federal Reserve has to say at the end of its two-day meeting on interest rates, key manufacturing data and, at week’s end, the U.S. government’s latest read on job creation.
Meanwhile, the Canadian dollar could find itself under pressure from data showing how the economy fared during August.
The TSX ended last week 4.7 per cent higher after European leaders agreed Thursday on a plan which will involve private investors taking bigger losses on the value of their Greek bonds.
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.
“I think you have at least a couple of positive days out of this rally, because, although it’s substantial, it’s clearly not enough,” added Pyle.
“I don’t think anyone out there really thinks that this does it. This is kind of like a good opening bid.”
Even on Friday, investor enthusiasm about the deal was starting to fade as investors considered the complexity of the plan and how little they know about how it will work — for example, what happens to the bond holders who will have to take that 50 per cent haircut on Greek debt?
“A lot of those bondholders are... pension funds that hold retirement money of individuals in Europe, insurance companies,” said Pyle.
“So, what are the plans for dealing with the balance sheet losses that those two types of entities are going to experience? That would be one reason for this market to take a cautious approach.”
Traders hope that more answers will be forthcoming from the summit meeting of G20 leaders on Thursday and Friday.
For one thing, analysts say the focus will be on indications that non-Europeans such as the International Monetary Fund, China, and Japan are prepared to contribute to the bigger bailout fund.
On the economic front, data are likely to show the Canadian economy expanded modestly in August, up 0.2 per cent, off slightly from the July reading of 0.3 per cent.
A slowing of the economy won’t surprise markets after the Bank of Canada warned earlier this week the economy is stalling as conditions slow across most of the globe.
Investors hope to find that the U.S. manufacturing sector continued to expand during October. Economists look for the Institute for Supply Management to report on Wednesday that its manufacturing index came in at 52.2, better than September’s reading of 51.6.
The U.S. Federal Reserve makes its next announcement on interest rates Wednesday afternoon. However, since the Fed has already vowed to keep rates near zero for some time to come, traders will look to the Fed’s statement for reassurance that the U.S. isn’t about to tip back into recession.
The week ends with October job creation data from the U.S. and Canada on Friday.
Expectations for the American government’s non-farm payrolls report were again very modest with economists looking for the creation of about 95,000 jobs following a gain of 103,000 jobs in September.
Pyle said the effect will be quick should if even those weak job creation figures aren’t met.
“If we get a negative surprise on that number, you’re going to see a massive whipsaw.”
In Canada, economists expected that about 20,000 jobs were created during October, down from September gains of almost 61,000.
“Underlying labour demand likely cooled amid the month’s escalating economic uncertainty and ebbing business confidence,” observed BMO Capital Markets senior economist Michael Gregory.
He expects the jobless rate to remain unchanged at 7.1 per cent.
Investors will also deal with another raft of third quarter earnings reports. Included in the earnings parade are paper company Abitibi Bowater (TSX:ABH) which reports Monday, pipeline company TransCanada (TSX:TRP) and telecom Bell Aliant (TSX:BA) hand in results Tuesday, while Talisman Energy (TSXL:TLM) delivers on Wednesday.
Thursday is an especially busy day with earnings reports coming in from Air Canada (TSX:AC.B) , HudBay Minerals (TSX:HBM), Sun Life Financial (TSX:SLF) and Canadian Natural Resources (TSX:CNQ) among others.