Greece gets a “time out” from Nicolas and Angela

Sometimes I think I’ve seen everything when it comes to the markets, but Greece has proven otherwise. We always knew that the debt deal reached in Europe last weekend was fragile since any of the 17 countries in the monetary union could easily scuttle it. However, I never would have dreamed that it would be Greece deciding to put its own debt deal in jeopardy. That’s precisely what happened when Prime Minister George Papandreou announced that the decision of accepting the deal would be put in the hands of the Greek people through a referendum.

Needless to say the market and European leaders, especially Nicolas Sarkozy and Angela Merkel, were not impressed by this politically driven move and took the Greek leader to task by sending markets lower initially and providing Greece with an ultimatum – you’re either in the Euro or you’re not. By the end of the week, Papandreou backed away from the referendum and faces a confidence vote on Friday night. Needless to say the Greek story is not yet over with this week’s chapter looking more like a tragedy.

Even with this added uncertainty and volatility, equity markets have actually held up relatively well and are only slightly lower for the week. This follows a reasonable week of earnings, the bankruptcy of MF Global and some economic data releases that missed expectations. While the U.S. ISM Manufacturing and Non-Manufacturing Indices were lower than expected, they still showed the U.S. economy was expanding albeit at a slow pace.

Meanwhile, employment reports in both Canada and the United States missed expectations. The miss in Canada was much larger than expected as the Canadian economy lost 54,000 net jobs while the U.S. created 80,000 net jobs when economists were looking for 95,000. Another G20 meeting came and went this week with little accomplished by the time it was over. It’s no surprise that Greece and the Eurozone were the main topics of discussion, so very little was accomplished when all was said and done.

Even though oil and precious metal prices strengthened slightly by week’s end, it was a poor week of performance for the Canadian dollar which fell by approximately two and half cents back below parity.

The Trading Week Ahead

Predicting the movements of the market on a day to day basis has become increasingly difficult over the past couple of weeks due to the unpredictability of the geopolitical world. However, Europe will try and move forward next week assuming that there is some sense of political stability in Greece following tonight’s confidence vote. The market does not like delays and is thankful the referendum has been taken off the table, but a loss in the confidence vote could send the Greek people to the polls regardless.

It will be a quiet week on the economic front as we will see few data points released in both Canada and the U.S. In fact, other than the usual weekly job statistics we see out of the U.S. every Thursday, there are no material data points that will move the market. If anything, the University of Michigan Confidence indicator

on Friday will give us a sense of sentiment amongst the American public as we get closer to Black Friday and the holiday shopping season.

While earnings news is starting to slow down in the U.S. as many companies have already reported their Q3 earnings, it will remain very busy for Canadian companies reporting their quarterly results. TSX 60 companies such as Cameco Corp, Shoppers Drug Mart, IAMGOLD, Silver Wheaton Corp, Enbridge, Tim Hortons, Canadian Tire Corp, Brookfield Asset Management and Power Corporation of Canada are all expected to release earnings by next Friday.

Movements in the commodity markets will once again be influenced by the ongoing events in Europe. Admittedly, energy and precious metal prices have held up well recently even as the situation in Greece became more uncertain. Tonight’s confidence vote will certainly have an impact on where markets will open come Monday morning.

And currency markets will also see continued volatility next week as a number of European questions remain unanswered. The Euro was lower this past week against the U.S. dollar but remains above its recent low seen at the end of September. The Canadian dollar reacted poorly to the Greek referendum announcement and was not helped by the poor employment report. The loonie will be looking to resource prices next week to find some support.

Question of the week

What are we to make of this week’s employment reports out of Canada and the U.S.?

The employment reports told different stories for the Canadian and U.S. economies. Canada’s net loss of 54,000 jobs in the month of October was disappointing considering that economists were looking for a gain of 15,000. What made this result even more unfortunate was that the composition of the net loss included a loss of 71,700 full time jobs offset by a gain of 17,700 part time jobs.

It’s never a good sign when part time jobs are replaced by full time employment. The loss of 54,000 essentially offset last month’s gain of 60,900 jobs, so there hasn’t been a great deal of net job creation over the past couple of months. What these results do show is that Canada is not immune from the financial and structural problems facing other countries around the world.

Prior to the recession of 2008, some market strategists suggested that Canada could “decouple” from the United States due to the high global demand for our resources. However, the recession in the United States illustrated that Canada cannot operate in isolation and the U.S. economy will be a leading indicator for Canada for many years to come.

The report out of the United States showed a net gain of 80,000 jobs in the month of October. While this number was lower than the 95,000 that economists were looking for, investors were encouraged by the upward revision to last month’s numbers where the job gains were increased from 103,000 to 158,000 and private job gains were increased from 137,000 to 191,000. While it is true that job creation still needs to accelerate further, it was encouraging to see that October’s report was not a complete disappointment and that perhaps there may be some level of stability returning to the U.S. job market.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP