TORONTO - The usually influential Canadian bank earnings season starts this week, but with the dreaded r-word -- recession -- looming over markets, it's likely any positives from the financial reports will be overshadowed by bad news abroad.
Canada's big banks are generally expected to report earnings growth compared with a weak quarter a year ago. But global economic and market turmoil are expected to hit their bottom lines, especially in their capital markets businesses.
Bank of Montreal (TSX: BMO), will kick off the third-quarter earnings season Tuesday, followed by Royal Bank (TSX:RY) on Friday. A CIBC World Markets report said the big six Canadian banks are expected to average 13 per cent year-over-year growth.
Paul Vaillancourt, vice-president at Canadian Wealth Management in Calgary, said he anticipates the banks will see a deceleration of profit growth, but an improvement nonetheless -- following the trend of a majority of Canadian companies that have already reported.
Bank stocks have been battered in recent weeks and are down 15 per cent from highs in early April as they feel the heat from worries about Europe's banking sector and economic turmoil in that continent and in the United States., Canada's largest trading partner.
But Vaillancourt said Canadian banks are some of the most insulated from exposure to Europe's debt problem, putting them far ahead of their global peers.
Canadian retail trade figures, expected to have risen 0.7 per cent in June, and payroll and earnings data will also trickle in this week, but are unlikely to move the Toronto Stock Exchange -much -- after positive reports on leading indicators, wholesale trade and inflation data last week were lost on investors.
That's because traders are intently focused on whether the U.S. and global economies are on the cusp of another recession -- and what impact that will have on the Canadian economy.
"The Canadian numbers as they stand really don't have much meaning in the context of what's going on in Europe, with this focus on, is the U.S. going into another recession? Those themes are so dominant right now, it's pretty hard to see any impact of Canadian numbers out there," said Andrew Pyle of Scotia McLeod.
The stock market ended last week down 4.3 per cent from the week before and down 15.9 per cent from its April 5 high of 14,270.53, putting it squarely in correction territory. A 400-point selloff Thursday was sparked by a slew of troubling economic data out of the U.S., which renewed fears it could slip into a recession.
Investors are acutely aware of the fact that Canada derives much of its revenue and business from the U.S. and any indicators suggesting the American economy isn't in good shape is bad news for Canada as well, Pyle said.
On Friday, Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney testified before the Commons finance committee. They didn't paint an rosy picture, but they also said it's unlikely Canada would find itself back in a recession.
Carney said the U.S. is facing its weakest recovery since the Depression, while Flaherty said the global economy continues to grow -- albeit more slowly -- and the results so far have been consistent with forecasts set out in the budget.
Pyle said that negative momentum is likely to continue this week, unless eurozone leaders or U.S. president Barack Obama can come up with any semblance of a concrete solution to their debt problems over the weekend, Pyle said.
"Everything depends now on politics as has been the case for the last four weeks," he said.
"A lot will depend on how sentiment evolves in these next two weeks and how the markets evolve."
Given the lack of political will to come up with concrete solutions to the European and U.S. crises, traders have been hitting panic mode as negative economic news trickles in.
Next week will be light with data from the U.S. but reports on new home sales and durable goods could move markets.
And although any negative news will continue to batter markets for the coming weeks, Vaillancourt said the upheaval this time -- caused by worries over government debts-- is quite different from the banking and corporate sector crisis of 2008.
Fundamentals, such as corporate balance sheets, remain strong, but are being overshadowed by the uncertainty on the government side, he said.
"Companies are not losing money, they're just instead of having EPS growth at 15 per cent for the market, it's now going to come in at nine or ten per cent."
Vaillancourt said he believes the global economy is slowing, but added it's far from a foregone conclusion that its slipping into a double dip recession.
"The fear right now, as there's so much panic, that you see deceleration and you see the world economy stalling because of panic, and therefore a crisis of confidence, it does impact selloffs ... and then a recession becomes a self-fulfilling prophecy."
Last Thursday, economists with Morgan Stanley said that the U.S. and Europe are "dangerously close to recession," adding, "it won't take much in the form of additional shocks to tip the balance." JPMorgan Chase & Co. followed suit on Friday, slashing its fourth-quarter growth forecast to one per cent from 2.5 per cent.
