08/24/2014 11:00 EDT | Updated 10/24/2014 05:59 EDT

Stocks set to advance on Fed reassurances, traders look to solid run of bank earnings

TORONTO - Stock markets look set to gain ground this week after traders got some reassurance from the Federal Reserve last week on interest rates.

The Toronto market could find some lift from the financial sector after Royal Bank (TSX:RY) on Friday kicked off the quarterly earnings season for the big banks with a record profit of $2.38 billion that beat expectations and then hiked its dividend.

There was strong performance across most sectors, led by its capital markets and wealth management divisions.

Analysts are looking for a solid quarterly performance from the rest of the big banks this week.

"I think you’re going to see a lot of the same themes," said Robert Gorman, chief portfolio strategist at TD Waterhouse.

"By and large, this sort of relative performance of the Royal will not be hugely different than the others. The variable will be capital markets as some of the banks are bigger in that than others. That’s the variable in the equation."

Whether further strong earnings reports will translate into hikes in share prices is another story.

Royal's share price failed to benefit Friday from the earnings report but the stock briefly hit an all-time high of just over $82 and the issue is up about 13 per cent year to date. The financial sector as a whole has charged ahead 12 per cent so far in 2014.

The U.S. Federal Reserve had a sizable role in determining sentiment last week as the discussion continued over the timing of Fed short-term interest rate hikes.

Markets have come around to the view that the Fed could very well move mid-2015 from near zero, where rates have been since the financial crisis. But the discussion has centred on whether improving economic conditions, particularly in the labour market, would persuade the Fed to move earlier.

Fed chairwoman Janet Yellen indicated in a speech to the central bank's annual economic symposium on Friday that she hasn't altered her view that the economy still needs support from ultra-low interest rates.

And she said that the Great Recession complicated the Fed’s ability to assess the U.S. job market and made it harder to determine when to adjust interest rates. She noted that while the unemployment rate has steadily declined, other gauges of the job market are harder to assess and may reflect continued weakness.

"They have leaned toward caution throughout and I think that will continue to be the case," Gorman said.

He said the Fed will want to be absolutely certain of a recovery in the labour market before it tightens monetary policy.

Traders will also digest some important economic data this week, including the latest reading on Canadian economic growth for June and the second quarter. Economists expect that Statistics Canada will report Friday that GDP grew by 0.2 per cent in June, which would translate into annualized growth of 2.6 per cent.

Economists point out that GDP revived from a slack start to the year as weather improved.

"Buoyant auto sales should see consumer spending rise by three per cent, contributing to the economy's pickup," said CIBC World Markets senior economist Peter Buchanan in a commentary.

"Net exports should also add to growth."

In the U.S., the durable goods report for July is out Tuesday and economists looked for a gain of seven per cent, reflecting a strong pickup in aircraft orders. Excluding transportation, durable goods orders were expected to rise by 0.4 per cent.

North American markets finished higher last week with the TSX ahead 1.51 per cent and the Dow industrials up 2.03 per cent. Sentiment was helped in part by strong housing and manufacturing data in the U.S. and also reassurance from the Fed that it is in no hurry to raise interest rates.