The week ahead: Stocks to face pressure from slowing economic conditions, eurozone turmoil

The Toronto market ended last week down another 1.48%. That left the main index down 2.17% from where it started the year, when traders were pleasantly surprised at a run of economic data that came in better than expected, including American job growth that was finally exceeding 200,000 jobs a month.

“I think part of the problem is that people got carried away (earlier this year),” said John Johnston, chief strategist at Davis Rea Ltd.

“We had a big runup in the markets as economic data surprised on the upside because expectations were too low last October, November. And then expectations came roaring back and we heard people on TV for weeks saying how wonderful everything was getting, same thing they said in 2010, 2011.”

Another indication that things are less than wonderful came in on Friday when China released data showing that industrial production rose 9.3% from a year earlier in April, slowing from a nearly 12% increase in March.

Markets are getting increasingly hopeful that the U.S. Federal Reserve will ride to the rescue again with a third round of economic stimulus known as quantitative easing. This involves the central bank printing money in order to buy bonds, which helps keep interest rates low and encourages people to buy equities.

But Johnston notes that the Fed is going to need more bad data in order to justify another round of easing.

“The data will ultimately force the Fed to do that,” he said, but it’s not going to be a matter of the central bank doing so just because the market thinks it’s time to provide another round of stimulus.

“In a toxic political environment, it’s going to need clear evidence because (Fed chairman Ben) Bernanke will have to sit down in front of those Republicans and say, ‘we were justified in doing this’. The data will have to be weak enough to create some good anxiety and I don’t know that we are there yet.”

The latest round of eurozone turmoil will also weigh on markets this week as it looks increasingly likely that Greece will be forced into another round of elections. Greeks went to the polls May 6 but no party emerged with the strength to form a government.

Last-ditch efforts by President Karolos Papoulias to broker a deal between wrangling party leaders ended with no deal in sight late Sunday. State television said talks would continue Monday evening between the heads of the parties that came in the top three spots in the elections.

The uncertainty surrounding the debt-plagued country also helped depress commodity prices last week as traders avoided riskier assets and piled into the safe haven status of U.S. Treasuries.

It’s now expected that Greeks will have to return to the polls next month. But at the same time, analysts are suggesting that events are accelerating and Greece will ultimately be forced out of the eurozone.

Gavin Graham, president of Gavin Investment Strategy, notes that two-thirds of the Greek electorate voted for parties that didn’t vote for the austerity programs that have enabled the country to survive on a series of bailouts.

And there seems to be a growing realization that the tough medicine prescribed to Greece hasn’t worked.

“Fact is, even after stiffing the bondholders 75%, even after shrinking the economy five per cent and rampant austerity and high unemployment, it’s not working,” Graham said.

“The resolution is that Greece and the Club Med countries leave the euro. That’s become the conventional wisdom that the moment Greece goes you have Portugal, Ireland and Spain and probably Italy as well.”

On the economic front, traders will take in the latest inflation data from Canada and the U.S.

In Canada, economists look for price pressures to ease in Friday’s inflation report despite rising gasoline and home prices, which were up 0.3% in April following a 0.4% gain in March.

The American Consumer Price Index is expected to climb 0.1% in April after rising 0.3% in March as gasoline price increases moderate.

Also in Canada, the March read on manufacturing sales will be released on Wednesday. Economists expect sales to rise by 0.3% following a similar-sized decline in February, reflecting a slide in exports for a third month in a row.

Traders will also look at the latest gauge of the health of the U.S. economy when April retail sales are released Tuesday. Those sales likely rose a by a modest 0.2% in April, the smallest gain so far in 2012.