Gains could be elusive on the Toronto stock market after investor enthusiasm was dampened last week by soft earnings reports, tepid economic data and moves by China to curb bank lending.
“Right now, the good news is priced into the financial markets,” said Paul Vaillancourt, director of asset allocation at Franklin Templeton Managed Investment Solutions.
“In the weeks ahead it’s going to be a bit of a see-saw type market because the good news was baked in and any negative surprise causes some profit taking.”
In the absence of market-moving economic data coming out this week, earnings will set the pace for trading. And earnings reports are more of a tough sell than they were over the past year because expectations are so much higher.
“I guess revenue of course is a key theme for the quarter,” said Patricia Croft, chief economist at RBC Global management.
“It’s all about revenues so I think there’s much more people going through this with a fine tooth comb, as opposed to thank goodness they’re actually reporting earnings.”
The major economic news of the week is the Bank of Canada’s interest rate announcement on Tuesday.
Analysts say the announcement likely won’t affect the equity markets since the central bank has widely telegraphed it has no intention of raising rates from near zero until at least the middle of the year.
“It’s a given that there will be no change (in rates) and probably no significant change in the outlook or the language associated with the announcement,” Croft said.
The Toronto stock market stepped back 2.24 per cent last week. The decline more than wiped out the gain of almost two per cent from the first week of 2010 trading.
A key volatility measure on stock markets, the VIX index, signalled a worrisome level of complacency at the start of last week, registering 16. The index hit almost 90 during some of the worst days of the financial crisis in the fall of 2008.
“The VIX was a bit of a shock,” said Croft, “Anything under 20 is a sign of complacency and complacency can be as risky as panic.”
But the markets got a splash of cold water at the start of the week when aluminum giant Alcoa missed earnings expectations and China’s central bank raised the proportion of deposits that banks must hold in reserve by half a percentage point. It also raised the yield it is offering on its one-year bills on Tuesday, its second increase in interbank markets in a week.
Investor disappointment piled up as banking giant JPMorgan Chase missed on revenue expectations.
Intel also suffered despite meeting earnings and revenue forecasts.
Analysts think a move by China to cool a hot economy will overhang market sentiment for the simple reason that investors hope the strong recovery in that country will pull other countries out of the economic slump.
The Toronto market’s commodity sectors in particular have benefited over the last 10 months from increased Chinese.
“The Chinese thing is for real,” added Vaillancourt, pointing to data showing the importance of China to the global economy.
“China’s metal consumption — its steel consumption is up over 20 per cent this (past) year. Copper consumption — people wonder why copper prices have more than doubled, well their copper consumption is up over 50 per cent this year. Capital expenditure has just surpassed Europe and the U.S.”