TORONTO — The resource-heavy Toronto stock market could be headed for another week of losses as commodity prices adjust to much lower expectations for economic growth.
And while economic data this week is expected to show that the Canadian economy continued to grow in early summer, investors aren’t expected to find encouragement in the numbers as the economic outlook likely worsened in August.
“Buckle up” for a rough ride, advised John Stephenson, portfolio manager at First Asset Funds Inc. after the TSX plunged 925 points or 7.46 per cent last week, landing squarely in bear market territory with the main index down 20 per cent from its highs of March.
There isn’t a great deal of economic data out this week to distract investors. The key Canadian report is the gross domestic product report for July, which comes out at the end of the week.
Statistics Canada is expected to report the economy grew 0.2 per cent that month, on top of a similar gain in June, thanks to strong manufacturing activity. However, its reception will likely be tempered by expectations that Canada’s economy, along with those of many other countries, started to stall again in the following month.
“July really predates the most serious episode of financial market turmoil which really began at the end of July so economic numbers from July or before really should be taken with a grain of salt,” said BMO Capital Markets deputy chief economist Doug Porter.
“The serious numbers are August and September. I’m certainly not looking at much growth, I think bumping along is the most likely scenario.”
Deteriorating confidence has been pushing stocks lower since early August amid impatience with the lack of a comprehensive plan to deal with the European debt crisis. Political acrimony seen over an attempt in the United States to arrive at an agreement to raise the U.S. debt limit raised serious doubt about the ability of policy-makers to keep the economy from slipping back into recession.
Fragile investment sentiment suffered a serious setback last Wednesday when the U.S. Federal Reserve declared there are “significant downside risks to the economic outlook,” which added to uncertainty that Europe’s fiscal crisis would not be contained.
“The concern here is that the Fed arguably was seen as the one policy-making institution that still had a lot of credibility and was seen as having some capability in turning things around,” said Porter.
“I don’t think they were saying anything but the obvious, but it just shows how vulnerable the market was to any bad news or the perception of bad news and they have basically fumbled an opportunity to support the confidence in the markets and somehow managed to unleash the opposite.”
Stephenson thinks it quite possible that even as markets have already priced in another economic downturn, there is worse to come on the TSX.
“I could see a 25 per cent downdraft from here,” he said.
“And the reason is simple. We have no global growth whatsoever. We have no bullets left in the gun to fire and there is no global growth on the horizon. You have industrial production flatlined across the globe, you have Europe in an absolute mess and it continues to snowball. They need to come up with a credible plan.”
The TSX is heavily based on the resource sector and plunging commodity prices have taken an especially heavy toll on the Toronto market, with the mining sector tumbling 23 per cent last week as copper plumbed new 52-week lows just above US$3 a pound while the energy sector fell 10 per cent.
Oil prices fell 9.6 per cent during the week to US$79.85 and Stephenson thinks they could move even lower.
“Certainly the last time we went through a crisis like this, it was around US$30,” he said
“But more realistically, it would be in the high 60s, low 70s. That’s a reasonable expectation where you would see energy prices going (and) I don’t really see much upside for energy in the short term.”