Traders look to bank earnings as distraction from debt crisis

“I doubt we get a Santa Claus rally this year just because of the uncertainty out there,” said Gareth Watson, vice-president of investment management and research at Richardson GMP Ltd.

Since a resolution to the debt crisis still seems far off, “the only thing that could really get the markets going here on a sustainable basis, (would be) good numbers here out of the start of the holiday shopping season. You’re going to have to see really strong employment numbers.”

Stock markets sold off — again — last week with the TSX tumbling 430.44 points or 3.61% and New York’s Dow industrials lost 564 points or 4.78% amid mounting worries the European debt crisis was spreading.

Italy’s borrowing rates skyrocketed at the end of the week in the wake of two auctions where investors demanded substantially more than similar auctions held in October, a sign of increased pessimism that the country will be able to make good on its debt.

The 10-year yield on Italian debt spiked above the seven% threshold that is widely considered unsustainable and eventually forced Greece, Ireland and Portugal to seek financial bailouts.

However, with debts of almost two trillion euros, Italy is considered too big to bail out.

There have been calls for the European Central Bank to deal with the crisis by declaring itself a lender of last resort and printing money to buy the bonds of debt-laden eurozone countries. But both the ECB and the German government are loath to do that, warning that it lets the more profligate countries off the hook for their bad practices.

For the same reason, Germany has opposed the use of eurobonds, which would be backed by the eurozone’s 17 member countries.

Watson believes the leaders won’t come to a final resolution on dealing with the crisis until they absolutely have to.

“These leaders are positioning themselves so that when things get worse, which they will do… they can fall back on the, ‘I tried, but this is our only option out there’,” he said.

Meanwhile, TD Bank (TSX:TD), CIBC (TSX:CM) report their fourth quarter earnings on Thursday while Scotiabank (TSX:BNS) and Royal Bank (TSX:RY) hand in results on Friday.

While analysts expect the banks to report handsome profits, Colin Cieszynski, market analyst at CMC Markets Canada suggested it could be a difficult quarter for the banks.

He thinks that the banks will be affected by their trading operations, reflecting a quarter where worries about the European debt crisis roiled markets, pushing the TSX to its 2011 lows in early October.

“We get these big swings up and big swings down and it’s really, really hard for anyone to make money in this kind of environment,” he said.

On a brighter note, the banks will likely benefit from a strong domestic environment and a particularly robust housing market.

“The Canadian retail banking side for the banks is one area that could potentially come out quite well,” said Cieszynski.

The week ends with traders getting the latest take on the health of the U.S. economy through the release of the non-farm payrolls report for November.

The consensus calls for the economy to have created about 120,000 jobs during November, up from the 80,000 in October.

“It’s modest relative to what we need for a quick recovery,” Watson said.

“They will probably be better than what you saw last month but still a number that is way below what we need to see to get those jobs lost during the recession.”

Canadian jobs data for November also comes out on Friday. The consensus calls for the creation of 12,000 jobs after markets were taken aback by data in October showing the loss of 54,000 jobs.

However, economists at BMO Capital Markets call for a weaker showing no growth in jobs for the month and an increase in the jobless rate to 7.4% from 7.3% in October.

“Employment in the cyclical manufacturing and construction industries has been particularly weak, suggesting economic momentum is slowing,” said senior economist Benjamin Reitzes.