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Stocks in for volatility to start November

TORONTO - November trading appears set to get off to a cautious and potentially volatile start.

TORONTO - November trading appears set to get off to a cautious and potentially volatile start.

Investors will be weighing the U.S. midterm elections, the latest snapshot of the American manufacturing sector, employment data and, most importantly, a long-anticipated move by the Federal Reserve to deliver another dose of stimulus to help the ailing U.S. economy.

"The good news is we have just come through two months that are usually fraught with some of the most risk for equity markets, so from a seasonal standpoint, it actually gets fairly friendly for equities," observed BMO Capital Markets deputy economist Doug Porter.

"But because of the vast array of events next week, it's potentially a wild and woolly week ahead for markets."

Stock markets made it through September and October, historically the two worst trading months of the year, on improving economic data and positive corporate earnings for the third quarter.

But in particular, markets got a boost in confidence from rising expectations that the Fed would step in to encourage lending and hopefully lift the economy by another round of buying U.S. government bonds, a measure known as quantitative easing. It involves the printing of huge amounts of U.S. dollars and speculation about the size and duration of such stimulus has made for a much weaker greenback over the last two months.

"There's just uncertainty now," said Andrew Pyle, associate portfolio manager at ScotiaMcLeod in Peterborough, Ont.

"Everyone is pretty sure we're getting some, not sure what and not sure if it's a lump sum, is it spread out over months? In other words, is the Fed going to say, 'We'll give you a trillion but it's only $100 billion a month for 10 months'? Or, 'We're going to do two big hits of $500 billion a month?'"

Singapore's DBS bank said in a report Friday it expects the Fed to announce initial bond purchases of between US$200 billion and $300 billion. However, some investors are looking for a program between $500 billion and $1 trillion, which opens up the possibility of big disappointment on Wednesday.

"No one knows," said Pyle.

"I think that's the biggest problem with next week's meeting is that we have come from getting a trillion to everyone in the room saying, 'Oh God I don't think we're going to get a trillion now'. So that's good, always makes for an interesting market."

And added to this is another level of uncertainty about just how much good another round of quantitative easing would do.

Porter suggested that the move is more a confidence builder.

"It's more than just driving down long term interest rates, that helps a little bit but the bigger issue is the injection of liquidity helps to lift most financial markets," he said.

"And that's really the channel through which I think it works, by lifting financial markets in general and strengthening confidence."

The Fed announcement comes a day after the U.S. midterm elections, which are expected to see Republicans gaining control of the House of Representatives.

"I think the conventional wisdom is that the Republicans are going to take the House but probably come short of gaining the Senate, which in itself is a bit of an unusual outcome for midterm elections to have a split result like that," Porter said.

"Because of that kind of a Congress, I think the assumption is that we're going to be in for a very interesting, shall we say, lame duck session and even possibly over the next couple of years it's going to be a real challenge to get much done in Washington with that kind of a Congress."

Meanwhile, investors will also take in the Institute for Supply Management's index on the manufacturing sector Monday.

Economists expect it to show a slight decline from September's reading of 54.4, which would still show expansion.

And the week wraps up with Fridays' release of employment data for the U.S. and Canada.

Expectations for the U.S. report are ultra-modest.

"We think we will see more private sector job gains that will be largely offset by cuts in state and local levels that will leave us up about 30,000 to 35,000," said Porter.

"Unfortunately, that won't be enough to keep the unemployment rate from nudging up another tick to 9.7 per cent in the U.S."

The picture is bright in Canada despite a slowing economy.

"It's a different world in Canada where we have seen public sector employment rise by five per cent in the past year," observed Porter.

"That's one of the reasons why Canadian employment has held up better and why we will continue to look a little bit better when we get our own numbers. We think we will see about 10,000 job gains and a stable unemployment rate here."

 
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