Earnings, bond auctions to focus investor attention

Corporate news will compete for attention with developments in the European debt crisis in the coming week as the fourth-quarter earnings season kicks off.

Corporate news will compete for attention with developments in the European debt crisis in the coming week as the fourth-quarter earnings season kicks off.

Aluminum giant Alcoa Inc. reports at the first of the week.

The U.S. company’s financial report could provide a clue for results later in the month from other companies on the resource-heavy TSX, where share prices have suffered from commodity prices that have headed lower on the expectation of slowing global economic growth.

Alcoa announced last week that it would reduce output from its aluminum smelters by 12 per cent globally in response to a softer market.

“Certainly resource companies could be a bit vulnerable (as) we have seen commodity prices come down a bit in recent months,” said Colin Cieszynski, market analyst at CMC Markets Canada.

Expectations for Alcoa are minimal with analyst earnings per share estimates coming in at one cent, compared to 21 cents in the same quarter a year ago.

But investors will be anxiously looking at corporate outlooks and that’s where things could get tricky.

The global economy has been slowing, even in emerging countries with strong economies such as China and Brazil.

Many economists expect Europe to slide into recession during 2012 as tough austerity measures enacted will choke off growth.

“I think a lot of companies are probably going to say, we’re not sure about our visibility right now because we don’t know where Europe is going to shake out,” said Cieszynski.

“Even if the U.S. does improve, the question is, does the U.S. improve fast enough to make up for the slowdown in Europe.”

The other big earnings report from stateside comes out on Friday when U.S. banking giant JPMorgan Chase releases results.

Analysts look for the bank to hand in earnings of 93 cents a share, far lower than last year’s $1.12 a share. JPMorgan, like other banks, has found results pressured by a still weak U.S. economy and fears of contagion from European banks. Its shares are down about 25 per cent from a year ago.

Quarterly earnings reports in Canada tend to lag those in the U.S. by about three weeks.

The earnings news will take place against the familiar backdrop of the European government debt crisis, which has grabbed investor attention despite a steady stream of positive economic news.

Markets failed to benefit at the end of last week from a much better than expected U.S. non-farm payrolls report for December as the economy created 200,000 jobs during the month, against the 155,000 that economists expected.

Instead, traders focused on the difficulties facing eurozone banks in raising capital to meet new European requirements for banks to shore up capital reserves.

There was also concern over bond auctions last week where demand was disappointing for French and German bonds.

And Italy again found itself having to serve up yields of more than seven per cent for its benchmark 10-year bonds amid soft demand.

“I’ve been in the business for 20 years and nobody really paid attention to bond auctions, they just went off,” observed Cieszynski.

“And now, it’s like they’re almost more like IPOs now, where everybody is like watching every single one to see what happened and (if) they over subscribed. When there’s not enough demand, they have to start raising the yield.”

Italy has to go to the bond markets to raise more money on Friday. Italy needs to auction bonds and bills totalling almost C450 billion in 2012.

Meanwhile, it’s a relatively light week for economic data.

The Bank of Canada announces its latest business outlook survey Monday.

The quarterly survey is not regarded as a major factor in the setting of monetary policy, but is sometimes quoted by the central bank as an indication of future economic activity.

Traders will also take in the December reading on housing starts Tuesday. The data is expected to show starts came in at an annual rate of 188,000, up from 181,200 in November.

November’s merchandise trade surplus for November comes out on Friday and it’s expected to come in at $400 million, down sharply from $890 million.

In the U.S., the Federal Reserve releases its latest regional economic survey, otherwise known as the Beige Book, on Wednesday.

And the December retail sales report comes out on Thursday. Economists expect the biggest retail month of the year saw sales rise by 0.2 per cent, the same amount which was chalked up in November.

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