TORONTO - The Toronto stock market likely faces more tough slogging in the weeks ahead as resource stocks lose ground alongside commodity prices amid a slowing global economy. And the other major TSX pillar, financials, will likely find gains elusive amid a slowing economy and housing sector.
At the same time, New York markets could be in for more volatility as traders try to gauge the intentions of the U.S. Federal Reserve as far as easing up on stimulus.
This week is also thin for economic data, with traders looking to U.S. retail sales and Canadian manufacturing shipments.
North American stock markets had very different outcomes last week as the Dow industrials edged up 0.87 per cent amid a stronger than expected reading on American job creation last month. The showing left the blue chip index up 16 per cent for the year.
But the TSX had yet another disappointing week, losing 2.14 per cent, led by declines in energy and base metal stocks, leaving the main index down about 60 appoints year to date.
"Unless the resource sector, unless commodities mount a significant recovery and rally in the last half of the year, it’s difficult to come up with scenario where the Toronto stock market does a lot better, let alone catches up the U.S.", said Andrew Pyle, portfolio manager at ScotiaMcLeod in Peterborough, Ont.
The resource sector has been dealing with a double whammy of chunks of the eurozone stuck in recession while Chinese economic growth is well off the highs or recent years. The International Monetary Fund in late May trimmed its growth forecast for China this year from eight per cent to 7.75 per cent due to weaker global demand.
"What’s happening on top of that, you have Canadian banks that are being looked at less favourably than U.S. banks, you have a lot of analysts out there now saying US banks offer better potential for growth than Canadian banks and that’s a big chunk of the TSX," added Pyle.
The U.S. markets have their own particular headwinds to face in the form of the fallout from comments by Fed chairman Ben Bernanke last month that the U.S. central bank might pull back on its $85 billion-a-month bond-buying program — known as quantitative easing — if economic data, especially hiring, improves significantly. Other Fed officials have spoken about a winding down of asset purchases sooner.
Those remarks set off a wave of volatility across stock markets, as QE has kept interest rates and bond yields low and also helped fuel a strong rally on stock markets this year.
But rising speculation about an easing of Fed purchases of bonds has also had the effect of depressing bond prices and raising yields, leaving the benchmark U.S. 10-year Treasury at about 2.15 per cent, up sharply from around 1.6 per cent at the beginning of May.
"I think that’s what really spooked the market, (and it) just shows how dependent the bond market and stock markets have been on the whole quantitative easing program," said Pyle.
Rising bond yields are negative on two fronts.
One, they can depress equities because investors feel they don't have to invest in stocks to get a decent return.
The other concern is that they could put the blocks to a steady bright spot in the American economy this year — the housing market
U.S. home prices soared 12.1 per cent in April from a year earlier, the biggest gain since February 2006, while sales of previously-occupied homes ticked up to a 3 1/2 year high that month.
But data released last week shows rising bond yields already affecting mortgage rates.
The average U.S. rate on a 15-year fixed mortgage rose above three per cent for the first time in a year, while the rate on the 30-year fixed loan approached four per cent.
"And I think this is where the market needs to get a bit more concerned," said Pyle.
"If an increase in mortgage rates causes the U.S. housing recovery to stall or slow, and if bond yields get to a level that are now attractive alternatives, that could induce a retracement."
Housing has been one of the key pillars for the U.S. economy this year and Pyle observed that "if you were to take housing out of the equation, growth would have been lower. So if you lose housing . . . that raises another issue for stocks over the summer."
On the economic front, traders are looking for U.S. retail sales in May to have increased by 0.4 per cent on top of a 0.1 per cent rise in April amid stronger auto sales.
And in Canada, Statistics Canada is expected to report that manufacturing shipments rose by 0.3 per cent during April after declining by 0.3 per cent in March.