The week ahead: Investors focus on European summit

The Toronto market finished sharply higher last week, rising 613 points or 5.34% on rising optimism that European officials are moving closer to outlining how they will resolve a worsening debt crisis once and for all.

They were further reassured at the end of the week when German Chancellor Angela Merkel said a plan for more effective action to contain the European financial crisis should involve tougher rules against government overspending. She said next the EU summit Dec. 9 would take up ways to enforce compliance and write those changes into EU treaties, which would be a drawn-out process.

It’s a fairly light week for economic data but investors will look to the next announcement on interest rates from the Bank of Canada and earnings reports from the banking sector.

Fears of more financial turmoil in Europe have left some European banks dependent on central bank loans to fund their daily operations. Other banks are wary of lending to them for fear of not getting paid back.

Markets got a much-need boost of confidence mid-week when the world’s biggest central banks including the Bank of Canada moved to improve shaky commercial banks’ ability to borrow U.S. dollars to fund their operations.

“It was an important step in the right direction,” said Norman Raschkowan, North American stragetist for Mackenzie Financial Corp.

“This is the first real sign that we’ve had since the European debt crisis came to the forefront that the global central banks were starting to work in unison again. And that’s what made it so significant.”

The push by Merkel on debt rules is seen as one half of an approach to finally get a grip on the crisis more than two years after it started in Greece.

The other half could be more short-term help for other heavily indebted governments from the European Central Bank. Bank President Mario Draghi on Thursday appeared to dangle an offer of new, extraordinary measures if political leaders at the summit can come together on the kinds of spending rules that Merkel and and French president Nicholas Sarkozy are advocating.

“Other elements might follow,” Draghi said, fueling speculation that the bank could step up its so-far limited program to buy government bonds issued by struggling countries such as Italy and Spain. That helps keep their borrowing costs down.

At the same time, analysts caution against expectations getting too elevated that the eurozone can fix this debt crisis in a matter of a few weeks.

“I think every time there is a summit people expect, look for something substantial and are disappointed _ that’s been the pattern,” added Raschkowan.

“I think a reasonable expectation, my own expectation is that there will be something substantive put in place by March or April.”

Meanwhile, investor attention will be fixed on the Bank of Canada Tuesday, even though the bank is widely expected to leave rates unchanged at one per cent for the foreseeable future amid slowing global economic growth and the uncertainty surrounding Europe’s debt crisis.

“The U.S. data has looked a touch better of late but Canada’s job recovery and inflation have cooled and Europe’s problems if anything have worsened since the last time out,” said a commentry from CIBC World Markets.

Investors will also take in housing starts data on Thursday and the latest reading on Canada’s Merchandise Trade Balance on Friday.

Lastly, traders will take in earnings reports from the last of the big Canadian banks.

Bank of Montreal (TSX:BMO) hands in results on Tuesday and National Bank (TSX:NA) reports on Thursday.

TD Bank (TSX:TD), CIBC (TSX:CM), Scotiabank (TSX:BNS) and Royal Bank (TSX:RY) reported last week and all beat analyst expectations. However, there was disappointment with outlooks for 2012 amid uncertainty surrounding Europe and low interest rates.