TSX set to improve on strong gains

TORONTO – The Toronto stock market looks set to build on strong gains racked up so far in October as traders prepared for another heavy week of earnings news from some of the biggest Canadian corporations.

Investors will also look to the U.S. Federal Reserve’s next interest rate meeting for clues as to when the Fed might start ratcheting back on key stimulus involving the monthly purchase of US$85 billion of bonds.

While the battered Canadian currency could find some support after Statistics Canada releases its latest take on economic growth.

The Toronto Stock Exchange racked up a gain of 1.25 per cent last week, the fourth straight advance for a market that had largely stalled for much of this year, dragged down primarily by base and precious metal stocks.

But a slew of positive earnings reports and the feeling that the global economic recovery continues to improve has taken the TSX to its highest levels since the summer of 2011, leaving it up seven per cent year-to-date.

And that advance has occurred during what is historically one of the worst months of the year for equity markets.

“It is a pretty good environment for the next two or three months,” said Sadiq Adatia, chief investment officer at Sun Life Global Investment.

“Equity markets are moving higher, bond yields have come off a little bit and it’s kind of, without jinxing it, the perfect environment right now.”

But he cautions that the mood will grow more cautious at the beginning of 2014 ahead of another round of wrangling about U.S. government funding and raising the debt ceiling again.

Last week featured positive reports from big mining companies, including Teck Resources (TSX:TCK.B) and Goldcorp (TSX:G).

This week, some of the biggest energy companies will take their turn as traders look to Suncor Energy (TSX:SU) and Canadian Oil Sands (TSX:COS) on Tuesday while Imperial Oil (TSX:IMO) posts results on Wednesday.

“We have seen oil prices be high for most of the quarter, coming off a bit over the last little while,” Adatia said. Prices held on close to US$110 for most of the quarter, inflated somewhat by geopolitical anxiety centred on Syria.

“But they have been pretty high, and probably more than expected, so it will be interesting to see how they translate that into earnings,” he said.

Other major companies reporting include transportation giant Bombardier (TSX:BBD.B) and First Quantum Minerals (TSX:FM) on Thursday.

Meanwhile, there will be more speculation about what the Fed might want to do about tapering its asset purchases as the central bank meets Wednesday.

Traders had thought the Fed would move last month to start winding up those purchases but the central bank surprised markets by leaving its latest instalment of quantitative easing intact.

At that time, political wrangling in Washington was heating up, leading to a partial U.S. government shutdown for a chunk of October and a deal to raise the debt ceiling was reached only at the last minute.

“You’re definitely not going to see any moves next week on QE,” said Gareth Watson, vice-president Investment Management and Research at Richardson GMP Ltd.

“We still have to digest the shutdown, this whole (stream of) economic data that’s going to come out over the next couple of months, it’s probably not going to be all that great. It’s going to take us through the end of the year and then we’ll have to start dealing all over again with Washington for January, February.”

He thinks that tapering won’t start at the very earliest until the March Fed meeting, which would be Janet Yellen’s first as the new chairwoman of the central bank.

“But I think even that might be a bit of a stretch,” said Watson.

On the economic front, Statistics Canada is expected to report Thursday that the economy slowed over the summer.

Economists believe gross domestic product grew by a still respectable 0.2 per cent in August, down from a 0.6 per cent pace in July when the economy was recovering from a Quebec construction sector strike and serious flooding in Alberta.

That could support a loonie which fell 1.5 cents last week after the Bank of Canada removed its tightening bias and downgraded its economic forecast through 2015.

The move led analysts to believe that interest rate hikes are off the table until 2015.

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