Stock markets will likely be under pressure this week as proposals to impose new restrictions on U.S. banks and moves by China to tighten credit continue to cast a pall.
Investors also will be looking to fourth-quarter earnings from Canadian companies, the U.S. Federal Reserve’s meeting on interest rates and the latest readings on American and Canadian economic growth.
North American stock markets fell sharply last week with the S&P/TSX composite index down 2.9 per cent and the Dow Jones industrials fell 4.2 per cent.
Commodity stocks could come under more selling pressure as doubts rose about how much China can help pull the developed world out of a severe economic slump.
Early last week, China moved to increase banks’ reserve requirements in a move to curb lending. Fears of even greater tightening came later in the week amid data showing China’s economic growth came in at 10.7 per cent in the fourth quarter of 2009 and 8.7 per cent for the entire year. The growth reinforced concerns Beijing will move to cut lending and tighten monetary policy to put a lid on inflation, which could dampen the global economic rebound.
“I don’t think China is going to tighten up that much but they do want to cool down,” said Philip Petursson, director of institutional equities at MFC Global Investment Management.
“What you actually hear is kind of like the real number might be quite above 10.1 per cent so with that in mind the Chinese government is saying, let’s pull this back a little bit and get it back to between eight and 10 per cent.”
It would also put more pressure on the commodity-related stocks and sectors in Canada.
“The largest buyer of base metals really is China,” added Petursson.
The banking sector is also going into this week under pressure after U.S. President Barack Obama unveiled plans for limits on how large big banks can be. He also aims to end some of the risky trading large financial companies have used in recent quarters to boost profits.
On the face of it, this shouldn’t affect Canadian banks but Canadian banks do have investments in the U.S., said Andrew Pyle, investment adviser at ScotiaMcleod in Peterborough, Ont..
“We do lend to American companies. Again, there is no way of saying how much of an impact that is going to have on Canadian financials. But it could have an impact and I think investors are just saying look, anything that has the word ’could’ means I get out.”
Pyle also observed the gyrations on the stock markets from uncertainty in the banking sector are happening at a time when many shares have rebounded very sharply off the lows from early March of last year.
“Obama has just given people like that really a reason why they may want to take profits,” he said.
The Canadian fourth-quarter earnings season starts going in earnest this week with several major corporations reporting include grocer Metro Inc. (TSX:MRU.A) and Canadian National Railways (TSX:CNR) on Tuesday expected to report results.
Tech company Celestica Inc. (TSX:CLS) reports Wednesday, followed by forestry company Tembec (TSX:TMB), Canadian Oil Sands Trust (TSX:COS.UN) and Canadian Pacific Railway (TSX:CP) and Potash Corp. (TSX:POT) on Thursday.
Investors will also be looking to the conclusion of the scheduled two-day interest rate meeting Wednesday of the U.S. Federal Reserve, which is widely expected to keep rates near zero.
Also in Washington, Investors will be waiting to see if the U.S. Senate will confirm the reappointment of Fed Chairman Ben Bernanke. Some lawmakers are holding Bernanke responsible for the economy’s lingering problems.
And at the end of the week, investors will get a reading on fourth quarter economic growth for the U.S. and Canada.
The consensus for U.S. annualized growth is about 4.5 per cent but Sal Guatieri, senior economist at BMO Capital Markets, said “a lot will simply be inventory restocking.”
“But that’s not a sustainable source of growth,” he added.
Canadian real GDP for November is expected to have grown by 0.2 per cent, the same pace as October.