BUSINESS

Eurozone worries to pressure stocks, loonie; traders look to bank earnings

05/20/2012 06:00 EDT | Updated 07/20/2012 05:12 EDT
TORONTO - Traders can look forward to what will likely be another week of high anxiety after worries about the eurozone continued to erode gains on the TSX last week.

But there will be some distraction during a shortened trading week in Canada in the form of quarterly earnings reports from some of the country's big banks, along with the latest readings on Canadian retail sales and U.S. durable goods orders.

Investors will also look to see if the loonie can find a more solid perch. The Canadian currency has swooned about three US cents during May, largely because of market nervousness over the eurozone.

Uncertainty has persuaded traders to pile into safe havens such as U.S. Treasuries and avoid riskier assets such as commodities (which have fallen to multi-month lows) and resource-based currencies such as the Canadian dollar.

"In the immediate near term, we have a spike higher in risk aversion," said Camilla Sutton, chief currency strategist at Scotia Capital.

"It sends flows into the U.S. market, the U.S. dollar really, just because the U.S. is the deepest capital market in the world. I think the other side is that Europe is a global problem and if there is an escalation in the European crisis, it has global growth ramifications and that will weigh on commodity prices and in turn the Canadian economy and the Canadian dollar."

Slowing global economic conditions coupled with uncertainty over whether Greece will stay in the eurozone and growing problems with Spanish banks sent the TSX tumbling 3.54 per cent last week, leaving the main index at its worst levels since October. This week will see only four days of trading on the TSX, as the exchange shuts down for the Victoria Day holiday Monday.

The worry is that Greek political parties dead set against the austerity programs that have made crucial bailouts possible will be in an influential position after the next election June 17. A repudiation of those agreements would likely trigger a default and Greece would have to exit the eurozone.

In the meantime, worries are spreading to Spain, which is deemed to big to bail out.

Ratings agency Moody’s Investor Services downgraded 16 Spanish banks Thursday as they face a rising tide of bad loans linked to Spain’s recession, a gloomy real estate market and high unemployment.

Spain's central bank said Friday that the level of bad loans on the books of the country’s banks has risen to an 18-year high.

"We’re starting to see that, the concerns about the banks are pretty seriously spreading even beyond Greece out to Spain certainly and even Italy, we’re seeing banks about to get downgraded, regions are getting downgraded," said Colin Cieszynski, market analyst at CMC Markets Canada.

"There’s quite a bit of concern out there and this could go on for awhile because nothing is going to get resolved before the Greek election, which is a month away and we’re going to see that uncertainty continue."

Meanwhile, traders are expecting another healthy run of quarterly reports from the big Canadian banks.

"The Canadian economy ran pretty well during the winter as we know from the employment reports so you would think their general core banking operations should be pretty good," said Cieszynski.

He said the banks will continue to see weakness in revenue from their capital markets divisions, reflecting a downturn on stock markets late in the quarter.

"That’s likely because we had a pretty good run to the beginning of March then things tailed off. You will probably see mixed results out of there."

CIBC World Markets expects average earnings for the big banks to decline by four per cent from the previous quarter, but up five per cent from the same quarter a year earlier.

"The sequential earnings contraction is largely due to the shorter quarter but is also being driven by a softer market outlook," said CIBC's Robert Sedran.

He is also looking for dividend increases from National Bank (TSX:NA), Canadian Western Bank (TSX:CWB) and Laurentian Bank (TSX:LB).

Bank of Montreal hands in earnings Wednesday while TD Bank (TSX:TD) and Royal Bank (TSX:RY) report the following day. Scotiabank (TSX:BNS) will deliver its earnings report on May 29, with National Bank and CIBC (TSX:CM) following up on May 30.

It's a thin week for economic news.

In Canada, Statistics Canada is expected to report retail sales rose by 0.4 per cent in March following a 0.2 per cent dip in the previous month. Economists say sales will be affected by a pullback in auto sales.

In the U.S., it is expected that durable goods order for April rose 0.5 per cent following a 3.9 per cent slide in March, which was largely caused by a drop in aircraft orders. It is expected a rebound in business equipment demand will support the rise.