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Traders watching austerity

TORONTO — Stock market traders will start the week off cautious as they wait to see if the Greek parliament can pass tough austerity measures needed to secure another round of bailout funds to stave off a default of the country’s massive debt.

TORONTO — Stock market traders will start the week off cautious as they wait to see if the Greek parliament can pass tough austerity measures needed to secure another round of bailout funds to stave off a default of the country’s massive debt.

“This vote is critical,” said Andrew Pyle, investment adviser with ScotiaMcLeod in Peterborough, Ont.

“Despite the fact we have a lot of numbers to look at next week and we close off the second quarter, Greece becomes once again the make it or break it development for equities and the bond market.”

Greek legislators will vote Tuesday on euro 78 billion (US$111 billion) of austerity measures, including spending cuts, tax hikes and massive privatization of state assets.

A default by Greece could drag down European banks and affect other financially troubled European countries. But there are real concerns whether legislators will vote for the tough measures amid massive strikes and demonstrations by angry Greeks.

Worries about a default by Greece and deteriorating economic conditions in the United States have made for a miserable second quarter on the TSX, which is down four per cent from where it started the year and 9.9 per cent from its most recent highs in early March.

However, markets could be in for at least a short-term bounce if Greece does pass those tough austerity measures.

“So you can breathe a sigh of relief and go, it’s all right for at least another few months,” said Gavin Graham of Graham Investment Strategy. “That could be the excuse for a big rally because we are, after all, off 10 per cent from the highs (of the year).

“It’s one of those situations where even though sensible people know it is not going to actually end up well, the market may choose to actually ignore that and just say, never mind we are going to party like it’s 2010 or whatever.”

The market could also find some relief in the near future from lower oil and gasoline prices.

Crude prices took a big hit at the end of last week after the International Energy Agency announced the release of 60 million barrels of oil from global strategic reserves in 28 countries because of the ongoing disruption of oil supplies from Libya.

Demand concerns also put pressure on prices after the U.S. Federal Reserve said it was lowering expectations for 2011 growth.

“The equity market is supposed to be looking forward and if oil drops to US$85 or lower, gasoline prices are lower, bond yields are lower, this equity market may turn around and start pricing in the fact that these are positive things for growth in the second half,” said Pyle.

On the economic front, traders will take in the latest growth figures from Canada and snapshots of U.S. consumer confidence and the American manufacturing sector.

Statistics Canada is expected to announce Thursday that the Canadian economy faltered in April, with growth easing by 0.1 per cent following a 0.3 per cent rise in March, marking the second decline in three months.

Economists at BMO Capital Markets say a drop in manufacturing activity is expected, partly due to a pullback in auto production in the wake of the earthquake and tsunami that hit Japan on March 11.

“Our call would leave GDP up a moderate 2.6 per cent from year-ago levels, about in line with the economy’s long-run trend but well down from last summer’s peak above a four per cent pace,” they said.

In the U.S., it is hoped that lower gasoline prices improved consumer sentiment during June. Economists expect the Conference Board’s latest index to tick up to 62 from 60.8 in May.

The Institute for Supply Management’s manufacturing index is expected to show slower expansion in June, coming in at 51.5, down from 53.5 in May.

“These are the tail end reports for the quarter that have definitely shown a deterioration in business confidence, which has been reflected in the Institute for Supply Management and also the regional manufacturing surveys,” added Pyle.

“And it’s reflected an erosion, not a massive erosion, but an erosion of consumer confidence.”