LOOKING AHEAD TO PREDICT MARKETS’ BEHAVIOUR.

Global woes cause stocks to lose ground

The Toronto stock market is expected to face tough slogging in the weeks ahead as a slowing global economy cuts commodity prices, causing resource stocks to lose ground. Financials, the other major pillar of the TSX index, will likely find gains for investors elusive amid a slowing housing sector.

At the same time, New York markets could be in for more volatility as traders try to gauge whether the U.S. Federal Reserve will curtail its stimulus policy.

The coming week is thin on new economic data, with traders looking to U.S. retail sales and Canadian manufacturing shipments.

North American stock markets had very different outcomes last week as the Dow industrials edged up 0.87 per cent amid a stronger-than-expected reading on American job creation last month. The showing left the blue chip index up 16 per cent for the year.

On the other hand, the TSX had yet another disappointing week, losing 2.14 per cent, led by declines in energy and base metal stocks, leaving the main index down about 60 points, or 0.5 per cent, year-to-date.

“Unless the resource sector, unless commodities mount a significant recovery and rally in the last half of the year, it’s difficult to come up with a scenario where the Toronto stock market does a lot better, let alone catches up the U.S.”, said Andrew Pyle, portfolio manager at ScotiaMcLeod in Peterborough, Ont.

The resource sector has been dealing with a double whammy of the recession in many parts of Europe while Chinese economic growth is well off the highs of recent years.

“You have a lot of analysts out there now saying U.S. banks offer better potential for growth than Canadian banks and that’s a big chunk of the TSX,” added Pyle.

The U.S. markets face their own headwinds from comments by Fed chairman Ben Bernanke last month that the U.S. central bank might pull back on its $85 billion US a month bond-buying program — known as quantitative easing — if economic data, especially hiring, improves significantly.

Those remarks set off a wave of volatility across stock markets. Meanwhile, the Fed’s changed stance has sent bond yields higher, leaving the benchmark U.S. 10-year Treasury at about 2.15 per cent, up sharply from around 1.6 per cent at the beginning of May.

“YOU HAVE A LOT OF ANALYSTS OUT THERE NOW SAYING U.S. BANKS OFFER BETTER POTENTIAL FOR GROWTH THAN CANADIAN BANKS AND THAT’S A BIG CHUNK OF THE TSX,” ANDREW PYLE

“I think that’s what really spooked the market, (and it) just shows how dependent the bond market and stock markets have been on the whole quantitative easing program,” said Pyle.

Rising bond yields can depress equities because investors don’t have to invest in stocks to get a decent return. The other concern is that they could dim the steady bright spot in the American economy this year — the housing market.

U.S. home prices soared 12.1 per cent in April from a year earlier, the biggest gain since February 2006, while sales of previously-occupied homes ticked up to a 3-1/2 year high.

But data released last week shows rising bond yields already affecting mortgage rates.

“And I think this is where the market needs to get a bit more concerned,” said Pyle.

Pyle observed that “if you were to take housing out of the equation, growth would have been lower. So if you lose housing ... that raises another issue for stocks over the summer.”