Europe’s debt crisis to weigh on markets

Stock markets likely face another week of volatility as the failure of European officials to deal convincingly with the region’s debt crisis are likely to continue to weigh on investor sentiment.

Stock markets likely face another week of volatility as the failure of European officials to deal convincingly with the region’s debt crisis are likely to continue to weigh on investor sentiment.

There isn’t much to divert trader attention away from Europe, with earnings season winding down and a light week for economic data. But markets will take in the latest reading on American retail sales while Statistics Canada will release reports on September manufacturing shipments and inflation figures for October.

In the meantime, “the market is being pulled very strongly two ways,” said James Muir, director at Fraser Mackenzie.

“If you get some sense of stability in Europe, then investors just say, ’I have to get on board and chase this.’ Then you get the days where it looks like the roof is going to cave in Europe and people are saying, ’I can’t take the chance of going through another 2008-2009 (market slide),’ and so they all rush for the exits at the same time. It’s a barbell, it’s either one way or another.”

Traders ended last week feeling a bit more optimistic about Europe amid a higher level of political stability.

The Italian Senate had moved to pass a budget bill containing economic reforms demanded by the European Union. And in Athens, premier Lucas Papademos swore in a new cabinet Friday, after being appointed to head an interim coalition government that will push through a new European debt deal and secure continued bailout funding to prevent a catastrophic default.

Now that the immediate political stability issues in the eurozone have been taken care of, there will be renewed focus on why Eurozone officials can’t come up with a way to contain the crisis.

Leaders announced a program in late October to expand the region’s bailout fund, get investors to accept a 50 per cent haircut on Greek debt and recapitalize banks that would be hurt by such a move.

But in the absence of an explanation of how this would work, investors are becoming more impatient for the European Central Bank to declare itself the lender of last resort, something the ECB has been loath to do.

“And that certainly is not positive, seeing as pretty well every other major economy does have a lender of last resort and really that is exactly the role the ECB does have to play at this point,” said BMO Capital Markets senior economist Doug Porter.

“The irony is if the ECB were to really come in aggressively, I think that might nip the problem in the bud. I think that other investors would just have a lot more certainty or confidence that markets like Italy’s wouldn’t fall that far if they knew there was a heavy support under it and might not cost the ECB much if anything.”

Meanwhile, investors anxious to feel the pulse of the American consumer looked forward to Tuesday’s release of retail sales data for October.

Economists look for a rise of about 0.2 per cent on the month amid decent sales in auto showrooms and chain stores despite deteriorating consumer confidence figures for the same month.

“Part of what explains it are the reasons why people lost confidence are factors that haven’t necessarily affected their spending ability, it’s not like gasoline prices have sprinted up, it’s not like we’ve had big job losses,” said Porter.

“It has been mostly headlines about the debt crisis first in the U.S. and Europe and for the average consumer that really hasn’t had a big impact on their spending power.”

In Canada, the major report for the week is the Canadian Consumer Price Index for October coming out on Friday.

Economists expect the CPI to rise by 0.1 per cent from the previous month, translating into an annualized figure of 2.7 per cent.

Oil prices have recently risen close to the US$100 a barrel level, the highest since mid-summer, but Porter doesn’t think that will impact October CPI data.

“That runup in oil prices has been a little too delayed to have much impact,” he said, “so actually energy prices probably weren’t a huge factor in October.”

And investors will get the latest reading on the Canadian manufacturing sector with the release of Manufacturing Shipments figures for September on Tuesday.

Economists looked for a 0.2 per cent gain.