Markets edgy over fiscal cliff

Stock markets in for more tough slogging

The Toronto stock market will likely be in for another week of lacklustre activity as the apparent lack of progress to arrive at a deal to stop the U.S. economy going over a “fiscal cliff ” leaves buyers firmly sidelined.

“I think that’s exactly what we’re going to see in the market ... certainly between now and the end of the year until a deal is struck,” said Philip Petursson, director of institutional equities at Manulife Asset Management.

“I think that what we are seeing in the U.S. markets is purely sentiment-driven, it’s not fundamentally driven,” he added.

The so-called “fiscal cliff” is the name for a situation that would arise at the end of December if substantial U.S. tax increases and spending cuts are triggered.

The worry is that the moves would immediately cut into economic growth, likely sending the U.S. into recession and taking other world economies along with it.

Traders will also be looking this week to the U.S. Federal Reserve to announce yet a further round of stimulus to help prop up a weak economic recovery.

The TSX ended last week down 0.65 per cent and led by a slide in gold stocks as bullion traded at or below the psychologically important $1,700 US an ounce level.

Energy stocks also contributed to the dip as demand concerns pushed oil down more than three per cent last week.

The Dow industrials rose one per cent.

At the same time, investors will digest news that the federal government has signed off on the takeover of Calgary-based Nexen by China’s CNOOC and Progress Energy Resources by Malaysia’s Petronas late Friday afternoon.

But in a wide-ranging update of foreign takeover rules, it has said it will only consider future takeover deals in the oilsands by state-owned companies in exceptional circumstances.

And all state-owned enter- prises seeking to buy large Canadian companies will face greater scrutiny over how they operate and how much control their home governments would have over how they do business.

The announcements could affect not only the individual stocks, but the resource sectors and the Canadian dollar as well.

The approval of the massive deals would be supportive of the Canadian dollar on Monday, said Camilla Sutton, chief currency strategist at Scotia Capital.

“I think it will be supportive, it’s more we would have a bigger impact if it didn’t go through”

“It’s an important issue for the currency,” he continued.

The Canadian dollar has been pushed higher in the past by big corporate deals.

That’s because a foreign buyer acquiring a Canadian company will need Canadian currency to close the deal, boosting demand for the loonie on financial markets.

The U.S. Federal Reserve could also provide some temporary distraction from negotiations over the “fiscal cliff.”

The Fed will be making its next scheduled announcement on interest rates on Wednesday.

The U.S. central bank has already said that it doesn’t plan on doing anything about rates, but it is widely expected to embark on further economic stimulus.

The Fed’s $400-billion US stimulus program, known as Operation Twist, is set to expire after 2012.

It involved the Fed buying $400 billion of longer-term Treasuries and simultaneously selling some of the shorterdated issues it already held in order to bring down long-term interest rates.

Now, economists expect the Fed will begin buying $40 million of long-term treasury securities each month.

This would be on top of an existing plan announced in September that involves the Fed buying $40 billion per month in mortgage-backed securities.

“If we get that plus hints of a fiscal deal, that could be icing on the cake for the markets,” said Peter Buchanan, senior economist with CIBC World Markets.

He also noted that the Fed will deliver its latest summary of economic projections through 2015, which is also the earliest the central bank would hike rates.