Stocks to Face Pressure from Slowing Economic Conditions, Eurozone Turmoil: Stocks Likely to Face Further Headwinds[1]

By Morrison, Malcolm | The Canadian Press, May 13, 2012 | Go to article overview

Stocks to Face Pressure from Slowing Economic Conditions, Eurozone Turmoil: Stocks Likely to Face Further Headwinds[1]


Morrison, Malcolm, The Canadian Press


TORONTO - The Toronto stock market looks set for another tepid showing this week with buyers discouraged by data showing further deterioration in economic conditions and rising uncertainty from the eurozone.

Market performance is also starting to look eerily similar to 2010 and 2011 when indexes started off strong, only to flag part way through the year.

The Toronto market ended last week down another 1.48 per cent. That left the main index down 2.17 per cent from where it started the year, when traders were pleasantly surprised at a run of economic data that came in better than expected, including American job growth that was finally exceeding 200,000 jobs a month.

"I think part of the problem is that people got carried away (earlier this year)," said John Johnston, chief strategist at Davis Rea Ltd.

"We had a big runup in the markets as economic data surprised on the upside because expectations were too low last October, November. And then expectations came roaring back and we heard people on TV for weeks saying how wonderful everything was getting, same thing they said in 2010, 2011."

Another indication that things are less than wonderful came in on Friday when China released data showing that industrial production rose 9.3 per cent from a year earlier in April, slowing from a nearly 12 per cent increase in March.

Markets are getting increasingly hopeful that the U.S. Federal Reserve will ride to the rescue again with a third round of economic stimulus known as quantitative easing. This involves the central bank printing money in order to buy bonds, which helps keep interest rates low and encourages people to buy equities.

But Johnston notes that the Fed is going to need more bad data in order to justify another round of easing.

"The data will ultimately force the Fed to do that," he said, but it's not going to be a matter of the central bank doing so just because the market thinks it's time to provide another round of stimulus.

"In a toxic political environment, it's going to need clear evidence because (Fed chairman Ben) Bernanke will have to sit down in front of those Republicans and say, 'we were justified in doing this'. The data will have to be weak enough to create some good anxiety and I don't know that we are there yet."

The latest round of eurozone turmoil will also weigh on markets this week as it looks increasingly likely that Greece will be forced into another round of elections. Greeks went to the polls May 6 but no party emerged with the strength to form a government. …

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