TORONTO - Stocks markets could be choppy this week as traders hope that economic data out later in the month will show the second-quarter malaise was just a soft patch and not something more serious.
That optimism could be tested by the start of what may be a disappointing corporate earnings season, which gets under way on Monday with an announcement from American aluminum producer Alcoa Inc. (NYSE:AA).
Markets slumped Friday after U.S. jobs data for June capped a string of disappointing second-quarter data.
The U.S. economy added an average of just 75,000 jobs a month in the April-June quarter — one-third of the pace in the first quarter.
"We’ve had the data suggesting that the second quarter was a rough quarter for the U.S.," said Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.
Now, he said, markets are desperate to find some direction from third-quarter data.
"It’s going to be one of two things," Pyle said.
He said either the data will show the economy is in a protracted spell of weakness or that the second quarter was a one-off in what could still be an OK year.
"I may be making it too simplistic but we need those indicators to firm up a view on either side of that," Pyle said.
Pyle thinks earnings reports will reflect a tough quarter for American corporations.
"When you look at some of the U.S. multinationals that will be reporting early, one of the problems that we’re going to have is the currency, the fact that the U.S. dollar ramped over strongly over most of the second quarter," he said.
The April-June period saw a considerable strengthening in the greenback as the European debt crisis worsened and traders sought the safe haven status of U.S. Treasuries.
"That elevation in the U.S. dollar is going to depress earnings for U.S. multinationals back home," said Pyle.
"I think that’s a challenge and that will definitely show up in the numbers."
As for Alcoa itself, analysts expect net income of seven cents per share, a decline of 78.1 per cent from the same quarter a year ago. During the past three months, the average estimate has moved down from 12 cents per Alcoa share.
Like other companies, Alcoa is dealing with more than just the strong U.S. dollar impacting earnings.
"I think it is a surprise to see global growth turn down so dramatically from one quarter to the next," said Patrick Blais, managing director and portfolio manager at Manulife Asset Management.
He said China's economic reports have been surprisingly weak.
"Whether it’s power consumption, commodity consumption, commodity purchases and inventory numbers, they have all proven to turn quite dramatically to the negative," Blais said
Traders will look to Wednesday's release of the minutes from the last U.S. Federal Reserve meeting to see if the central bank is leaning towards another round of quantitative easing to provide more stimulus to the economy.
Such stimulus involves the Fed adding money to the financial system by purchasing bonds.
Pyle thinks the Fed isn’t quite ready to pull out another round of QE.
He thinks if the jobs number had come in flat or payrolls not grown it at all, markets would have started to price in further stimulus.
"But it wasn’t enough of a miss to solidify that so I have more uncertainty on Fed policy," he said.
