TORONTO - The European government debt crisis and worries over the health of eurozone banks will command investor attention again this week, but traders could be in for some welcome diversion in what is expected to be a string of positive third-quarter earnings reports in North America.
"We've been kind of through this, almost two years now, where people have expected the earnings season to disappoint and for the most part it hasn't," said Gareth Watson, vice-president investment management and research at Richardson GMP Ltd.
"Corporations have still done well in a tricky environment and we all know the reasons -- (they've) become leaner and more efficient organizations."
Aluminum company Alcoa Inc. kicks off the earnings season Tuesday. The company is regarded as an economic barometer since its output finds its way into so many products, including cars, aircraft and infrastructure.
Alcoa is expected to hand in earnings of 23 cents a share, a big improvement from nine cents a year ago. But that is sharply lower than the 36 cents a share that analysts expected in July amid softer aluminum prices and slowing orders from customers in Europe, where a government debt crisis continues to worsen amid fears of a disorderly default by Greece that could put tremendous pressure on eurozone banks.
Companies as diverse as Pepsico, banking giant JPMorgan Chase, Google Inc. and No. 1 toy maker Mattel also report their latest profit and revenue figures during the week.
The TSX finished last week little changed while the threat of government debt default in Europe grew after ratings agency Fitch downgraded its sovereign credit ratings for Italy and Spain.
The agency also said its long-term outlook for both countries was negative, citing high debt and poor prospects for growth.
Traders had felt somewhat more optimistic that European officials were finally responding to market worries that banks in the sector can't withstand a default even by Greece.
Markets had responded positively after the European Central Bank offered new emergency loans to banks on Thursday to help steady them through the government debt crisis.
The ECB will offer an unlimited amount of 12- and 13-month loans to banks. That will provide financing for a longer period and shield them from turbulence in borrowing markets.
But analysts observed that the measures won't keep banks from facing questions about solvency.
They say that markets will remain highly volatile and fragile until much more meaningful action is take to shore up those banks.
"You're going to need something big... to make sure that we don't have a collapse of the financial system in Europe," said Watson, adding that that means a comprehensive plan to backstop the continent's financial institutions.
And it has to happen quickly.
"We talk about this European stability facility," he said, referring to the eurozone bailout fund established earlier this year.
"This was created in the summer, (now) they're talking about increasing it and they haven't even passed the first one."
All 17 eurozone members have to pass the proposal for establishing the facility.
Markets failed to find lift at the end of last week from data showing modest job creation in Canada and the United States in September.
This week, Statistics Canada hands in the latest trade figures on Thursday. The merchandise trade balance deficit for August is expected to have grown to $1 billion from $800 million in July.
"Commodity prices took a licking in August," observed BMO Capital Markets deputy chief economist Doug Porter, adding that the effect of this will likely be offset by a drop of almost three per cent in the Canadian dollar during the month.
The agency is also expected to report on Friday that manufacturing sales rose 0.5 per cent in August, down sharply from a 2.7 per cent rise in July.
In the U.S., investors will take in the minutes from the U.S. Federal Reserve's interest rate meeting of Sept. 20-21. Analysts say the minutes could contain clues as to what steps the Fed could be looking at to help the American economy avoid recession.
And U.S. retail sales for September come out Friday. Sales are believed to have risen 0.5 per cent last month, helped along by a surge in vehicle purchases.
Markets are expected to remain volatile because of the European debt crisis and Watson doesn't see this changing any time soon.
"On on the whole, I still think that Europe is going to be driving this market for the rest of this year and into 2012."
Worries about Europe and the danger of global economies slipping back into recession have left the TSX 19.12 per cent lower than the recent highs of early March.
