Traders weigh positive economic data with Federal Reserve stimulus intentions

Toronto (Nov 10)   The Toronto stock market is likely in for a lacklustre week amid a slowing of quarterly earnings reports, a dearth of market-moving economic data and uncertainty about what the U.S. Federal Reserve may do about a key stimulus program.

At the same time, the markets are coming off a week of significant developments, including a surprise rate cut by the European Central Bank and better than expected U.S. economic growth and jobs data.

"Really, we’re talking about a pretty quiet week," said Colin Cieszynski, senior market analyst for CMC Markets Canada.

"There’s a lot for people to digest right now (and) that could easily keep markets on hold through the first half of next week."

Uncertainty about when the Fed might cut back on its monthly US$85 billion of bond purchases has been increasing on markets since the end of October when the central hinted that the economy could be strong enough to withstand a reduction in asset purchases as soon as December.

That uncertainty grew last week in the wake of third-quarter economic growth and job creation data that both came in much better than expected.

The suspense could continue to build until the middle of next week when the Fed releases minutes from its Oct. 29 meeting.

Investors have become used to the central bank's stimulus helping to prop up markets almost constantly since the 2008 financial meltdown. The quantitative easing has supported strong rallies on many markets, leaving the Dow industrials up about 20 per cent year to date and the S&P 500 ahead about 24 per cent.

And investors remember what has happened in the past when the Fed has withdrawn stimulus.

"As soon as you take away the liquidity that's been propping it up, then bang, the last two QEs ended with 10 per cent drops in the stock market," observed Cieszynski.

The TSX hasn't been a beneficiary of the Fed stimulus. The Toronto market is up only about 7.5 per cent so far this year and those gains didn't really stick until the past six weeks amid indications of improving growth in China and Europe and no sign the housing market was coming in for a hard landing.

"Canada has lagged so far behind everyone else that we’re not overripe or overextended and due for a correction," said Cieszynski.

"Could you get a pullback in Canada? Maybe, but probably not as much as other places."

The TSX ended last week with a modest 0.3 per cent rise, with the interest rate sensitive utilities sector leading losers, down 2.25 per cent. The group suffered as U.S. bond yields moved up sharply on Fed speculation with the key U.S. 10-year Treasury ending last week at 2.76 per cent, up 0.16 of a point from Thursday.

Another vulnerable sector going into the week could be the gold component. Increasing speculation about Fed tapering has sent the U.S. dollar higher along with American bond yields while bullion prices have fallen sharply.

"Anything that’s an inflation hedge is getting hurt," said Philip Petursson, managing director, portfolio advisory group, Manulife Asset Management.

"So all of a sudden the gold bugs don't have reason to own gold with quantitative easing near its end. And the bond market is saying we thought we had a six-month delay, maybe that six months delay is only three months in terms of the beginning of tapering. The (Fed) meeting minutes will tell a lot."

On the economic front, traders will look to key economic data from China coming out on the weekend, including retail sales, inflation and industrial production.

Later in the week, traders will take in the latest reading on Canada's trade balance and manufacturing shipments.

Markets will also absorb U.S. trade data along with industrial production figures.