Commodity stocks and earnings likely to pressure TSX this coming week
TORONTO - The Toronto stock market is likely to see more declines in the coming week as commodity stocks drift lower and investors look to a second-quarter earnings season that is likely to be a letdown.
"I think the trend is going to be down for the next two or three months, we're still in a defined bear market trend," said Danielle Park at Venable Park Investment Counsel in Barrie, Ont.
"Nothing on the technical picture looks like any kind of a sustained breakout yet for the overall markets - so I think people will continue to be disappointed over the summer and into the fall."
The Toronto market finished in the red last week, down 1.4 per cent amid great volatility in crude oil futures and the financial sector.
Oil prices fell US$16.20 or 11.6 per cent last week, just a week after hitting an intraday record high of US$147.27 on July 11, dragging the energy sector down six per cent on investor concerns that demand will soften as economic conditions worsen in the U.S. and other developed countries.
The slide was sparked by a comment by U.S. Federal Reserve chairman Ben Bernanke that the American economy's dip will be more severe than expected while figures released at mid-week showed sharply rising inventories of crude oil and gasoline.
"This not a blip, it's a systemic shift," said Park, who thinks lower demand will force oil prices well below US$100 a barrel.
The commodity stocks slide hasn't been confined to oil - base metals stocks have also fallen sharply with the mining sector down 6.7 per cent last week.
"There is a significant correction here, that is demand based," observed Park.
"I think the realization is wow, (there is) substantial slowing in demand worldwide. There has to be a connection there."
The financial sector has been on the upswing, rising just over four per cent last week on U.S. government efforts to bolster mortgage giants Fannie Mae and Freddie Mac, including steps to prohibit shorting in the two stocks.
And investors were impressed with better than expected earnings from the likes of Citigroup and Wells Fargo. But despite the rising confidence in the sector, Park is not convinced the sector is out of the woods by any means.
"I have no way of knowing that we have come to the bottom of financials but they certainly have discounted a lot of bad news. I wouldn't be surprised if they have a turnaround at some point over the next few months because they've been creamed," she said.
Meanwhile, Canadian investors will start to get reports from companies here at home during the next week with 27 TSX composite members releasing their results - and outside of the resource sector, they're not expected to be pretty.
CIBC World Markets senior economist Peter Buchanan noted that "the big picture is fairly good, but if you start drilling down then there are some discomforting notes."
"Expected growth in earnings is fairly narrowly based."
He said that the market is looking for a 45 per cent year over year increase from the materials and energy sectors combined, about 10 per cent stronger than the first quarter.
Elsewhere, in the financials sector, "the good news there is that the outlook isn't quite as grim as it is in the U.S.," said Buchanan.
"The bad news of course is the curve there is down. We had a very slight decline in the first quarter, we're probably going to see earnings down about six per cent or so in the second quarter and that reflects declines in both the banks and the insurers as well."
He said the overall expectation is for a 17 per cent increase in earnings, about the same as the first quarter.
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