The Toronto market ended last week 1.82 per cent higher while New York's Dow industrials plowed ahead 3.84 per cent after U.S. lawmakers reached an 11th hour deal to avert big tax hikes and spending cuts that were due to kick in at the start of the year.
However, traders worry that U.S. budget talks could pose a threat to risk appetite for months.
The reporting season kicks off after the close Tuesday when resource giant Alcoa Inc. hands in results that are expected to be an improvement from a year ago.
"With the earnings season, I think most people expect it to be fairly decent," said Andrew Pyle, investment adviser with ScotiaMcLeod in Peterborough, Ont.
"The economy didn’t fall apart in the fourth quarter of last year, in fact there were signs of re-acceleration in some sectors. I think most people are setting reasonable expectations because there are sectors where we will still see pressure, in the materials sector for example where Alcoa is going to launch from."
Alcoa's earnings are eagerly anticipated since the aluminum company's products are used in a wide variety of industries, everything from cars to appliances.
It's also viewed as a good indication of where the overall resource sector is at, an important consideration for a market like the TSX that is heavily weighted in favour of commodity-based companies.
Analysts expect Alcoa to turn in earnings of six cents a share, a big improvement from the three cent a share loss the company posted a year ago and the 13-cent a share loss from the third quarter.
The company has been pressured by a global manufacturing slowdown, and in particular by falling demand from China last year.
Aluminum prices were weak during the fourth quarter, losing about about two per cent on the London Metal Exchange.
Those lower prices were mentioned by ratings agency Moody's Investor Service late last month when it placed Alcoa's debt on review for a possible downgrade. It also cited the weak U.S. economy, the debt crisis in Europe, and slower growth in China.
Beyond earnings, seasonal factors will likely play a role in market sentiment this week.
"We’re partway through the period of seasonal strength," said John Johnston, chief strategist at Davis Rea Ltd.
"The intermediate cycle turned up in late November, early December and it probably has a couple of months to run on the upside."
At the same time, there is a feeling that while the fiscal cliff scenario was narrowly avoided last week, it won’t be long before other U.S. fiscal challenges pop up to test investor patience.
For example, lawmakers will next be engaged in negotiations to hike the U.S. debt limit in early March.
"And that is unfortunate," added Pyle.
"I think most individuals will view what we’ve just been through (last week) kind of it. That was a hurdle we had to cross, we’ve crossed and now it makes for smooth sailing where in fact, it’s not clear sailing, we still have other hurdles that you have to cross and that’s only one of them."
The U.S. Federal Reserve cast a shadow over markets last week that could carry on into this week.
Minutes from the Fed's policy meeting last month showed while policy-makers expressed broad support for the Fed’s plan to buy bonds to support the U.S. economy, there was a split over how long to continue the purchases.
Some of its voting members thought they would continue through this year, while others thought they should be slowed or stopped before the end of 2013 amid concerns that the continued bond purchases, known as quantitative easing, would destabilize the economy.
Meanwhile, it's a light week for economic data this week.
The major Canadian reports are December housing starts which come out on Wednesday. Canada Mortgage and Housing Corp. is expected to report that starts came in at an annual rate of 195,000, down 0.6 per cent from the previous month as the feverish housing sector continues to cool.
And on Friday, Statistics Canada releases the Merchandise Trade Balance for November. Economists expect the agency to report that falling commodity prices helped push the balance to a a deficit of $700 million, up from $170 million in October.Suggest a correction