Traders look to progress on avoiding huge U.S. spending cuts, corporate earnings

TORONTO – Gains could be hard to find on stock markets this week as traders wonder if the current rally on markets has run out of steam and look to a looming deadline for massive, automated government spending cuts to take place in the U.S. at the end of the month.

Traders will also take in reports from several of the top miners in the TSX resource sector.

The Toronto stock market finished lower last week, in large part because of earnings disappointments from the mining and oil groups.

Gold miners have been struggling with higher labour and material costs and oil companies have been dealing with a higher price differential between benchmark West Texas Intermediate crude and the Western Canadian select that comes from the oilsands.

The TSX fell 0.9 per cent while New York’s Dow industrials ended the week flat.

It’s a shortened trading week in Canada and the U.S., with the TSX closed Monday because of Ontario’s Family Day holiday and American markets shuttered for Presidents Day.

The year on North American markets started strongly after U.S. lawmakers reached a last-minute deal to avoid the “fiscal cliff” of sweeping tax hikes and spending cuts. The Dow industrials ran up about six per cent during January and the TSX about 2.3 per cent.

Those gains are largely intact but analysts wouldn’t be surprised to see the tone turn a lot more cautious as the end of month deadline nears for sequestration legislation, which would result in across the board budget cuts totalling just over US$85.3 billion.

It would cut a big chunk out of American economic growth, a worrisome prospect for an economy struggling to put in growth of two per cent.

“It hasn’t attracted that much attention on the widespread assumption that this will all be rectified in some fashion and hopefully there will be a meeting of the minds,” said Bob Gorman, chief portfolio strategist at TD Waterhouse.

“I would not be surprised to see this ramp up in the consciousness of traders quite a bit. It just has not been on the radar screen interestingly.”

But even leaving the sequester issue aside, indexes are largely where they started the month, indicating that traders see no reason to drive prices higher. At the same, volatility indexes are very low.

Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont., observes that markets have stayed up while losing momentum and volatility measures low.

“One of the worrisome things about what we’re dealing with right now is whenever you get volatility in the market declining to where we are right now, very low, it sends a false signal to retail investors that it’s a riskless market,” he said.

“The retail investor is always last to the party. The big money is selling equity to the guys coming into the party last and that’s usually an indication that we’re probably going to roll over here and it’s the typical story. The retail investor is last to the party, buys high, suffers the pullback and misread the signals of the market.”

Meanwhile, it’s another busy week on the earnings front as companies from the mining, consumer and transportation sector post results.

Yamana Gold (TSX:YRI) and Iamgold (TSX:IMG) report on Wednesday amid expectations their results will reflect problems bedevilling other precious metals miners.

“It’s a combination of things,” said Gorman.

“The price of gold has been sliding, they’re having big issues surrounding new mine development, other issues on the cost side. So it’s been a very difficult place to be.”

Other companies reporting include HudBay Minerals (TSX:HBM), also on Wednesday. Transportation giant Bombardier Inc. (TSX:BBD.B), grocer Loblaw Cos. (TSX:L), and miners Lundin Mining (TSX:LUN) and First Quantum Minerals (TSX:FM) hand in results Thursday. Traders will hear from Eldorado Gold (TSX:ELD) and conglomerate Onex Corp. (TSX:OCX) on Friday.

On the economic front, the major Canadian reports of the week come out Friday.

Statistics Canada was expected to report that December retail sales fell 0.5 per cent with the biggest drag coming from weaker auto sales. The agency also comes out with the latest consumer price index for January. Economists looked for a rise in prices of 0.1 per cent for the month.

In the U.S., traders will take in January housing starts on Wednesday. And existing house sales come out Thursday.

“Housing data will be the feature with starts likely to retreat from an off-the chart jump the prior month,” said CIBC World Markets chief economist Avery Shenfeld.

“Existing home sales could also see a marginal slip but we still se a broad uptrend intact for the next few years.”

Investors will also look to the release of the minutes from the latest Federal Reserve meeting on interest rates. They will be scanned for any hints as to how long the Fed will carry on with its stimulus measures that involve printing money to buy up bonds.

“I don’t think we’ll find any,” said Pyle.

“The only thing we’re going to find are more people sitting at the table at these Fed meetings and getting antsy about the size of the balance sheet and the logic or lack thereof of continuing the current quantitative easing program.”