Traders wary of fiscal cliff

Traders will likely be in a wait-and-see frame of mind this week as they look to some kind of progress from American politicians towards a vital budget compromise that would pull the economy away from a so-called fiscal cliff.

Traders will likely be in a wait-and-see frame of mind this week as they look to some kind of progress from American politicians towards a vital budget compromise that would pull the economy away from a so-called fiscal cliff.

They will also be anxious to see how American retailers fared over the weekend as the holiday retail season got into gear, and the first indication of how the Canadian financial sector performed over the last quarter.

North American stock markets racked up solid gains last week on optimism that American lawmakers can put aside steep ideological differences and come together on a compromise to avoid steep spending cuts and tax increases which would be triggered by the first of the year.

Traders were also encouraged by millions of Americans flocking to shopping malls Thursday night and Friday to scoop up bargains.

The TSX gained 2.82 per cent after falling 2.6 per cent the previous week while the Dow industrials were up 3.34 per cent after losing almost two per cent.

Also supporting markets was a sharp runup in Research In Motion shares (TSX:RIM)(NASDAQ:RIMM). The stock surged $2.38 or 25.8 per cent to 11.61 during the week, with gains concentrated last Thursday after a National Bank Financial analyst upped his share price target. That move came amid rising optimism about RIM’s new BlackBerry 10 operating system, which will be unveiled at a Jan. 30 event along with its new line of smartphones. It’s viewed as a make or break product launch for Research In Motion.

Negotiations over avoiding the fiscal cliff will likely dominate market sentiment since failure to avoid those tax hikes and spending cuts would represent such a shock to the economy that it would likely go back into recession.

“The markets gave a pass last week because of the (Thanksgiving) holiday and because President Obama was overseas,” said Colin Cieszynski, market analyst at CMC Markets Canada.

“Now, they’re going to want to see them getting back to work and see signs they are actually working towards a deal and they can get something done by the end of the year. The posturing had better not last long, the markets are going to be right on them I think.”

Markets had tumbled in the seven sessions after the Nov. 6 election as the results of the contest left the political status quo largely intact, raising worries that Republicans and Democrats wouldn’t be willing to compromise.

But sentiment took a positive turn as the initial meetings between the two sides Nov. 16 showed politicians in a more conciliatory mood.

Meanwhile, Royal Bank (TSX:RY) kicks off a string of earnings by the big Canadian banks. It’s reporting on Thursday.

Analysts surveyed by Thomson Reuters expect Royal to turn in $1.26 per share of adjusted earnings on $7.4 billion of revenue for the three months ended Oct. 31.

Generally, analysts don’t have huge expectations for this quarter amid a slowing Canadian economy and, more particularly, a cooling off of the real estate market, which would impact the money banks make from mortgages.

“On the mortgage side you could start to see a bit of a slowdown, even if it doesn’t show up in the numbers people will be looking to see if there are any comments on it for going forward,” said Cieszynski.

“Some of the earnings may get trimmed a bit as we go forward.”

And he doesn’t expect the banks to dole out any extra money to shareholders since the big five Canadian banks raised their dividends last quarter.

The rest of the big banks report next week.

Also capturing traders’ attention will be the launch of public trading of Canada’s oldest company, Hudson’s Bay Co. (TSX:HBC) Monday on the Toronto Stock Exchange.

Its return to the public stock market values the retail company at $17 a share, or about $2 billion in total. HBC says it plans to sell a total 21 million shares — about one-fifth of the company’s stock — raising about $365 million through an initial public offering.

An IPO is a rare and risky move during this volatile time for stock markets, so eyes will be watching to see whether traders believe the company is worth the $17 per share it is asking.

In early trading last week, on a so-called “if and when issued basis,” HBC shares ended the week at $16.85 per share.

On the economic front, the major event of the week is the September reading on gross domestic product. Statistics Canada is expected to report the economy grew by 0.1 per cent during the month. Such a reading would translate into the economy growing by 0.9 per cent at an annual rate during the third quarter.

“A sharp deterioration in net exports, slicing more than two (percentage) points from growth, and emerging weakness in housing are expected to weigh on GDP,” said BMO Capital Markets senior economist Benjamin Reitzes.

In the U.S., investors will look to October durable goods, the S&P/Case-Shiller home price index and the Conference Board’s latest take on consumer confidence on Tuesday.

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