TORONTO - The usually influential Canadian bank earnings season starts
this week, but with the dreaded r-word — recession — looming over
markets, it's likely any positives from the financial reports will be
overshadowed by bad news abroad.
Canada's big banks are
generally expected to report earnings growth compared with a weak
quarter a year ago. But global economic and market turmoil are expected
to hit their bottom lines, especially in their capital markets
businesses.
Bank of Montreal (TSX: BMO), will kick off the
third-quarter earnings season Tuesday, followed by Royal Bank (TSX:RY)
on Friday. A CIBC World Markets report said the big six Canadian banks
are expected to average 13 per cent year-over-year growth.
Paul
Vaillancourt, vice-president at Canadian Wealth Management in Calgary,
said he anticipates the banks will see a deceleration of profit growth,
but an improvement nonetheless — following the trend of a majority of
Canadian companies that have already reported.
Bank stocks have
been battered in recent weeks and are down 15 per cent from highs in
early April as they feel the heat from worries about Europe's banking
sector and economic turmoil in that continent and in the United States.,
Canada's largest trading partner.
But Vaillancourt said Canadian
banks are some of the most insulated from exposure to Europe's debt
problem, putting them far ahead of their global peers.
Canadian
retail trade figures, expected to have risen 0.7 per cent in June, and
payroll and earnings data will also trickle in this week, but are
unlikely to move the Toronto Stock Exchange -much — after positive
reports on leading indicators, wholesale trade and inflation data last
week were lost on investors.
That's because traders are intently
focused on whether the U.S. and global economies are on the cusp of
another recession — and what impact that will have on the Canadian
economy.
"The Canadian numbers as they stand really don't have
much meaning in the context of what's going on in Europe, with this
focus on, is the U.S. going into another recession? Those themes are so
dominant right now, it's pretty hard to see any impact of Canadian
numbers out there," said Andrew Pyle of Scotia McLeod.
The stock
market ended last week down 4.3 per cent from the week before and down
15.9 per cent from its April 5 high of 14,270.53, putting it squarely in
correction territory. A 400-point selloff Thursday was sparked by a
slew of troubling economic data out of the U.S., which renewed fears it
could slip into a recession.
Investors are acutely aware of the
fact that Canada derives much of its revenue and business from the U.S.
and any indicators suggesting the American economy isn't in good shape
is bad news for Canada as well, Pyle said.
On Friday, Finance
Minister Jim Flaherty and Bank of Canada governor Mark Carney testified
before the Commons finance committee. They didn't paint an rosy picture,
but they also said it's unlikely Canada would find itself back in a
recession.
Carney said the U.S. is facing its weakest recovery
since the Depression, while Flaherty said the global economy continues
to grow — albeit more slowly — and the results so far have been
consistent with forecasts set out in the budget.
Pyle said that
negative momentum is likely to continue this week, unless eurozone
leaders or U.S. president Barack Obama can come up with any semblance of
a concrete solution to their debt problems over the weekend, Pyle said.
"Everything depends now on politics as has been the case for the last four weeks," he said.
"A lot will depend on how sentiment evolves in these next two weeks and how the markets evolve."
Given
the lack of political will to come up with concrete solutions to the
European and U.S. crises, traders have been hitting panic mode as
negative economic news trickles in.
Next week will be light with data from the U.S. but reports on new home sales and durable goods could move markets.
And
although any negative news will continue to batter markets for the
coming weeks, Vaillancourt said the upheaval this time — caused by
worries over government debts— is quite different from the banking and
corporate sector crisis of 2008.
Fundamentals, such as corporate
balance sheets, remain strong, but are being overshadowed by the
uncertainty on the government side, he said.
"Companies are not
losing money, they're just instead of having EPS growth at 15 per cent
for the market, it's now going to come in at nine or ten per cent."
Vaillancourt
said he believes the global economy is slowing, but added it's far from
a foregone conclusion that its slipping into a double dip recession.
"The
fear right now, as there's so much panic, that you see deceleration and
you see the world economy stalling because of panic, and therefore a
crisis of confidence, it does impact selloffs ... and then a recession
becomes a self-fulfilling prophecy."
Last Thursday, economists
with Morgan Stanley said that the U.S. and Europe are "dangerously close
to recession," adding, "it won't take much in the form of additional
shocks to tip the balance." JPMorgan Chase & Co. followed suit on
Friday, slashing its fourth-quarter growth forecast to one per cent from
2.5 per cent.
