Tough week expected on stock markets as Fed tapers

On emerging market worries


TORONTO – Stock markets look set to extend a sell-off rooted in concerns about emerging markets and about corporate earnings deemed not quite good enough to extend last year’s powerful equity rally.

At the same, the focus will be on the Federal Reserve as traders look to see if the U.S. central bank will carry on with plans to continue to wind up its key stimulus program despite a weak jobs report for December.

“People are very bearish,” said John Stephenson, portfolio manager at First Asset Funds.

“No question, sentiment is overwhelming negative and (investors) are looking for a reason to sell.”

North American indexes fell sharply last week, with the TSX tumbling 1.23 per cent while New York’s Dow industrials fell 3.52 per cent.

Part of the reason was data showing that the Chinese manufacturing sector slipped into contraction territory in January.

But the Fed was the focal point of concerns that made investors step back amid worries about sharp drops in the value of currencies in several emerging markets, including Turkey, Russia, South Africa and Argentina.

These drops were sparked by moves by the Fed to cut back on its massive bond purchases, a key stimulus measure that fuelled a stock market rally and also kept long-term rates low. But U.S. bond yields have risen as the Fed moves to taper its purchases and investors have respondent by taking their money out of emerging markets.

This, in turn, has created anxiety about foreign exchange levels in these countries.

“And this all ties back to the Fed,” said Andrew Pyle, wealth adviser at ScotiaMcLeod in Peterborough, Ont.

“Because everyone believes the Fed is now tapering, (long-term) rates are going up in the U.S. and it’s causing a reverse of all that hot money flow that had gone into the emerging markets — now it’s going out and creating a problem,” Pyle said.

“It’s getting traction because analysts can see the impact on foreign exchange reserves. They look at the governments in these various countries and see a lack of leadership or management of this problem.”

The Fed decided in December to start cutting back on its monthly bond purchases by US$10 billion to $75 billion and the central bank is widely expected to further taper those asset purchases. Those purchases not only fuelled a strong rally on equity markets last year, they also have kept long-term rates low.

But U.S. bond yields have increased since last May, when the Fed first mooted the possibility of tapering, with the benchmark 10-year Treasury rising from about 1.6 per cent last April to about three per cent earlier this month. Yields have since backed off to about 2.75 per cent.

There doesn’t seem to be much doubt that the Fed will announce plans Wednesday to further cut back on asset purchases.

“I think they have to establish a program and I think the market expects that,” Pyle said.

He added these emerging market countries are paying the price for borrowing too heavily when long term-rates were lower.

The latest raft of fourth-quarter earnings reports in the U.S. haven’t done much for positive sentiment either.

It’s not that earnings and revenue have come in poorly. Pyle noted that beats on the revenue side are about 67 per cent (while) earnings were about 73 per cent in terms of beating expectations.

However, he observed that it’s not good enough to prevent a correction on U.S. markets that haven’t experienced a serious setback in about 18 months and while the S&P 500 index soared 30 per cent last year.

Meanwhile, quarterly earnings from Canadian companies pick up the pace this week. Among them, traders will take in earnings from grocer Metro (TSX:MRU) Canadian Pacific Railway (TSX:CP), PotashCorp (TSX:POT), and tech firm Celestica (TSX:CLS).

Investors will also digest the latest growth figures from Canada and the U.S. during the week.,

Statistics Canada is expected to report Friday that gross domestic product grew by 0.2 per cent in November amid rising manufacturing sales. That would be a slight dip from 0.3 per cent GDP growth in October.

Fierce winter weather is expected to have taken a toll on December GDP growth. But senior economist Peter Buchanan at CIBC World Markets said that “a 0.2 per cent rise in November, and comparable decline in the final month of the year, would leave fourth-quarter growth headed for a 2.7 per cent annualized increase.”

In the U.S., it is expected that data out Thursday will show fourth-quarter economic growth came in at an annualized pace of 3.2 per cent, following a 4.1 per cent rise in the previous quarter.

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Tough week expected on stock markets as Fed tapers

  1. The bubble is bursting, time to fleece the sheep.

    • Yep. Think rich, be rich. Your worst enemy to your economic health is your own government.

      Me, I ignored Flahtery calling on Candains investing in Canda and I went offshore. The money is sent offshore is not only earning me money, because the CAD decline devalued Canada, my foreign investments are immune to the devaluation. Worth 11% more for a 10 cent drop, 1.00 / 0.90 == 11%.

      Wealthy know government is your worst enemy. Many even knwo Ottawa uses tariffs for $45 billion in hidden taxes you don’t see and price prop ups on autos, cheese, beef, foods, clothing etc al.

      You are economic slaves of state. Government is about the illusion of benefit to get your money.

      • This government has been the best friend of the wealthy…slashing the corporate tax rate with no strings attached was either moronic or intentionally obtuse; seeing as it’s Fiscal Failure Flaherty in charge, I’ll leave the choice to you. Each new free trade deal is a disaster because it leaves the door open for companies to move away with no consequences whatsoever…no entry fee, no cover charge, no requirement that if you move Canadian jobs overseas the company is on the hook for the EI for its workers for 3-5 years (or they surrender their assets in Canada). Encouraging big business is one thing…being total patsies to them is quite another.

        Meanwhile, the real job creators are small domestic businesses who continue to be beaten like unloved mules by their own governments. There are more trade barriers between the provinces than there are between Canada and most other countries now, and it is slowly strangling our economy.

        Jim Flaherty is more like Nero, fiddling while the house burns down, convinced of his own god-like infallibility by a cast of fawning pretenders who loot the palace’s silverware whenever his back is turned.

  2. State of the Union address is upcoming.

  3. time to buy the correction soon…

  4. Good markets in the last year have been driven not by growth, not by earnigns but driven by inflation.

    What has more value today? NYSE: or CAD money in TSX: here?

    If I put $100,000 CAD into USD a year ago, I would have $111,000 CAD today and that is before I invest it in NYSE for an average return of 12%.

    Reality is fiat fraud debt by our corrupt governments has made fiat money increasingly value less. Reason banks don’t pay interest is that the future value of fiat money is zero. A rapidly depreciating asset.

    Better off to own stock, gold, real-estate or something the governemtn can’t “print out of thin air”.

    Been 7 1/2 years of thin air money debt ponzi fraud and Keynes economic fraud….and the economy is still a mess. As Einstein said, doing the same thing again and again and expecting different results is insanity.

    We are witnessing the fall of the corrupt western governments. Too much non-value added government consumption and not enough production to support it.