How Will The Markets React?
The Canadian markets were in for a wild ride Friday. A global rush of risk aversion and a full economic calendar stoked volatility but did little for providing any definite direction for the markets going into the week. Looking over the charts, it was clear fundamental traders started stirring in the overnight, leading both government bonds and equities to gap lower on the open. Shading action for the Canadian session before local traders even came to their screens, the Asian and European markets were extending their three-day losses and in turn fueling fears that risky and mature trades like long equities and long carry were a thing of the past. When Canada?s fully stocked economic calendar finally came online, the first indicator effectively dulled action for the rest of the day. Statistics Canada?s labor indicators for May crossed the wires largely in line with expectations. Employers took on 9,300 new workers - restoring a seven-month positive trend that was put off by April?s contraction. Though there was a lot of stock behind an employment surprise, the later reported housing starts and trade figures helped to restore confidence in the Canadian economy. The physical trade report printed a sixteen-month high, C$5.8 billion surplus despite the national currency?s steady march to new highs. The other report to cross the wires was the better-than-expected housing starts number for May. Accelerating nearly 18,000 to a 229,700-annual pace, the starts number helps set the scene for next Monday?s report. The New Housing Price Index for April is balancing on expectations of a repeat 0.3 percent increase. This opens the door for a sharp reaction after a surprise. The related building permits gauge for the same period is guiding expectations to a slight decline since residential filings cooled 1.4 percent following a record jump in March. Recently, the BoC said it expects homebuilding to detract from growth in 2007, shaving 0.1 percent points from GDP. This could jeopardize rate hike. Bonds - 10-Year Canadian Government Bond Futures
Canadian government bond yields were able to finish the day off in positive territory, though an early morning rebound erased a lot of the gains early. Initially, the market opened with a clear agenda - extending Thursday?s sharp sell off. In fact, futures on the ten-year bond opened 72 points below the previous day?s close. The low was quickly put into place though, when a supportive economic calendar helped to soothe the rapid rally in yields. Looking ahead to Monday, the direction and intensity for price action will hinge on any lingering sentiment of risk aversion. Should fears not carry over the weekend; the market will then turn to the docket?s housing data. Should housing prices contribute to inflation, it would offer another boost to hike expectations that have grown in recent weeks.
FX - USD/CAD
This week will serve as a major test for USDCAD, as thin data flow could leave Loonie to flounder. New Housing Prices are estimated to grow 0.3 percent once again in the month of April, though USDCAD reaction will be mild given the release?s low market-moving status. At the same time, the Capacity Utilization Rate is predicted to edge higher. Thought to be a leading indicator of inflation, the announcement may give Loonie a brief boost - albeit a small one. Nevertheless, regardless of the scheduled releases this week, markets have little reason to sell-off the Canadian dollar considering that oil prices remain lofty, CPI is still above 2.0 percent, and exports are holding up well. All of these factors underpin the case for a hike by the Bank of Canada in July, and with the US Fed likely to remain on hold throughout the year, shifting interest rate differential are slowly working in the favor of Loonie. As a result, markets should remain cautious of trying to capture a turn in USDCAD, as there is little fundamental basis for a full turnaround and the pair could indeed continue to plow down through 1.0550.
Equities - S&P/TSX Composite Index
Canadian stocks rose for the first time in four days, helping to pare its biggest weekly loss in three months, which was originally touched off by concerns that inflation will lead the Bank of Canada to raise interest rates. The S&P/TSX added __ percent close out the week at 13,796.95. Financial shares rose after leading the S&P/TSX Composite Index lower all week, with Royal Bank of Canada, the country's largest lender by assets, up C$0.91 cents to C$56.80 while Bank of Montreal, the fourth-biggest, rose C$0.99 cents to C$69.59. Meanwhile, commodity producers made a comeback even as copper and crude oil prices dropped. Teck Cominco, a miner of zinc and copper, rose C$0.93 cents to C$45.41 after plunging 1.8 percent earlier in the session while Petro-Canada, the nation's third-biggest oil and gas producer, rose C$0.95 cents to C$53.96.
Canadian equity price action will likely remain contingent upon global stock market trends along with commodity prices, though major surprises in economic releases for the country could have an impact. Traders should be aware that New Housing Prices and the Capacity Utilization Rate for the first quarter are both scheduled to hit the tape Monday morning. The housing data is estimated to add to inflation concerns as it may to show that prices continue to rise throughout the sector, especially in the Alberta region where Canadians have moved to en masse to work on oil-sands projects. Meanwhile, an anticipated pick up in the Capacity Utilization Rate could also add to price worries and further underpin the case for a hike by the Bank of Canada in July. While this is all bearish for the S&P/TSX, the data will only really weigh on the index if equity prices are already soft and aren?t likely to turn share prices lower on their own.