TORONTO - The coming week will likely be marked by high volatility on stock markets as European debt problems continue to unsettle global economic stability.
"I can't see (volatility) dissipating soon," says Andrew Pyle, investment adviser with ScotiaMcLeod.
Markets have routinely surged and tumbled hundreds of points in a single session over the last two weeks as traders respond to news reports and rumours and look for some direction.
Greece remains at the heart of the current problem, with many investors waiting to see when and if the country will get the next tranche of bailout money. If it doesn't, some fear a debt default could have serious repercussions for the European economy — and the rest of the world.
"These guys need to get in a room and not just hand out a bailout package here and there. It has to involve a structural change to Europe that takes everything off the table," Pyle says.
Europe's government debt woes, coupled with a sluggish U.S. economy and signs that Chinese demand could be slipping have driven down commodity prices, a mainstay of the resource-heavy Toronto Stock Exchange.
Investors going into the final quarter of the year are desperate for decent economic data after a dismal third quarter that saw the TSX fall 12.6 per cent while New York's Dow industrials fell 12.1 per cent since June.
The TSX is down about 19 per cent since the highs of the year in early March.
Greece was saved from default by an initial euro110 billion bailout in May last year. A planned second bailout of euro109 billion for Greece this year includes a voluntary participation by private bondholders, who agreed to write off about 20 per cent on their Greek debt holdings.
Many experts, however, say those writedowns should be closer to 50 per cent.
Investors assessing the climate on stock markets will be looking to a series of key U.S. economic reports this week that will help them gauge whether the world's biggest economy is stalling further and possibly slipping back into recession.
Traders will take in the latest influential purchasing managers surveys of the U.S. manufacturing and service sectors along with factory orders and at the end of the week, the all-important American non-farm payrolls report.
Dismal job growth data and a still-weakening housing market have kept U.S. economic gains minimal, although revised data out last week showed the American economy growing by 1.3 per cent in the second quarter, up from the original estimate of one per cent.
Expectations for September employment growth in the U.S. are minimal with economists thinking the economy created about 56,000 jobs last month following flat job growth in August while July data showed only 85,000 jobs were created.
"It's a modest number but again, the key thing now is, modest is good, declines are bad," Pyle said.
"And declines say recession, modest just says this is just a lousy recovery."
Pyle added that it is an important distinction as investors try to gauge where the economy is going in the near future and "whether economic numbers suggest we're going into recession and just going to have crap growth for another two quarters or whatever."
Canadian employment data for September will also be released on Friday. The consensus calls for the creation of another 10,000 jobs following a net loss of 5,500 in August.
"After a dip in August, the September employment release will be closely watched for evidence of a sustained slowdown," said BMO Capital Markets deputy chief economist Doug Porter.
"The survey will be pulled by two conflicting forces— a rebound in education payrolls, and an underlying cooling in growth."
Pyle said in many ways the decline shouldn't have surprised anyone given that the global economy is still struggling to recover from a severe downturn that started in 2008.
"We weren't just in a recession, we were actually in a balance sheet contraction," he observed.
"Balance sheet contractions are different from recessions. You don't come out of them as easily in about a year. You come out of them in five years and the growth that comes out of it isn't great either."
He added that economic realities suggest that the market is very close to where it should be "and in fact, I would argue we are still probably high relative to where the market should be."
Meanwhile, data out on Monday are expected to show the U.S. manufacturing sector should barely avoid slipping into contraction during September. The Institute for Supply Management's index on the sector is expected to come in at 50.4, slightly lower than the August reading of 50.6. A reading below 50 signals contraction.
The non-manufacturing index comes out Wednesday and economists expect a reading of 53, down slightly from the August reading of 53.3.