TORONTO – North American markets are likely in for more volatility and sideways action this week as traders look to the final act of the Canadian first quarter corporate earnings season — reports from the big Canadian banks.
Royal Bank (TSX:RY) and TD Bank (TSX:TD) kick off the stream of earnings on Thursday and analysts are expecting another solid if unspectacular quarter.
“With the banks, it’s more of a steady as she goes kind of quarter,” said Colin Cieszynski, senior market analyst at CMC Markets.
Together, the big six banks in Canada — Royal Bank, TD Bank, Scotiabank (TSX:BNS), CIBC (TSX:CM), Bank of Montreal (TSX:BMO) and National Bank (TSX:NA) — earned a total of $8.49 billion in the first quarter, up from $7.64 billion in the first quarter of 2013.
Cieszynski noted that the economy generally “was pretty good” in the February-March-April period so, for Canada, “you were past the worst of the severe winter weather by then.”
“We didn’t have an ice storm shutting down things for days so the overall economy should have been relatively decent through that period and I’m expecting just another chug along business as usual kind of quarter for them,” he said.
He also doesn’t expect major moves in dividends after Scotiabank, RBC, TD and CIBC all upped their payouts last time around.
Cieszynski also doesn’t think the earnings will yield another leg up in stock prices for the big banks, all of which are very close to their 52-week highs.
He said the banks look fairly valued and there would need to be “something really positive” for further stock appreciation in the wake of the earnings reports.
“And it’s not just the bank themselves,” he said. “In general, for the market I think a lot of (good news) has already been priced in, particularly with the U.S. markets.”
The feeling that markets are fairly valued right now is also a big reason why stock markets stalled as the TSX finished last week little changed, down 19 points or 0.13 per cent, while the Dow industrials shed 92 points or 0.6 per cent, leaving the blue chip index below where it started the year.
Buying sentiment was derailed after eurozone growth figures for the first quarter came in well below expectations while retail giant and economic bellwether Wal-Mart Stores delivered a disappointing outlook for the current quarter.
But that data also came during a week in which the S&P 500 index briefly cracked the 1,900 level for the first time.
“Sellers would like to sell into good markets,” said Wes Mills, chief investment officer, Scotia Private Client Group. “So, asset allocators say OK, I feel good selling at near the highs into a strong market and I’ll look at things later in the year when I’m more comfortable that earnings have caught up to valuations and things look cheap again. Things are fairly valued, they’re not that expensive.”
At the same time, Mills doesn’t think a downturn is in order. In fact, he thinks this current bull cycle can carry on for another year or two.
“Yes we’re due for some kind of a correction,” he said.
“We think we may or may not get one. Sometimes you just get a time correction — markets just trade sideways for a period of time, don’t go anywhere and earnings continue to rise modestly to a point where valuations then get attractive and you’re prepared for the next move up.”
Last week’s performance left the Toronto market still ahead 6.57 per cent for the year. But that’s close to where analysts thought the TSX would up end up for the whole year.
“That was our call, for about seven per cent on the year,” said Mills.
“Things continue to improve modestly but when you get a fully valued market, then you get this rotation as portfolio managers look for the next thing that’s going to give you a little bit of a bump. So, I expect that to continue for the bulk of the year, at least until we get to the end of the third quarter.”