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Investors to focus on rate decision, earnings

TORONTO - It's a busy week shaping up on stock and financial markets as investors look to the Bank of Canada to take a break from hiking interest rates while taking in a slew of earnings from major U.S. corporations and Canadian companies.

TORONTO - It's a busy week shaping up on stock and financial markets as investors look to the Bank of Canada to take a break from hiking interest rates while taking in a slew of earnings from major U.S. corporations and Canadian companies.

Investors start the week feeling reassured after U.S. Federal Reserve chairman Ben Bernanke reiterated that he is ready to do more to stimulate the sluggish economy. Bernanke's comments were the latest confirmation the Fed is about to ramp up its purchase of Treasury bonds to spark growth.

There doesn't seem to be much doubt that the Bank of Canada is set to take a break Tuesday after raising rates three times during 2010 to one per cent, reflecting a slowing Canadian economy and faltering growth around the globe.

And analysts suggest that it won't be just a one-off pause.

"I think pretty much everyone now is looking for them to go on hold (and) we certainly have been of the view that they would pause for some time," said Peter Buchanan, senior economist with CIBC World Markets.

"And what's interesting is the (market) is still pricing in something like an 80 per cent chance of another rate hike by early in the second quarter of 2011. So that really relates to one of the key things people will be looking to get out of this statement, some sense of how long they will be on hold — whether it's a couple of quarters or whether potentially a bit longer than that."

It wasn't that long ago that analysts were looking for the Bank of Canada to continue raising rates well into 2010, but that was at a time when the economy was growing strongly and job growth was impressive.

But CIBC recently projected that real Canadian gross domestic product will grow by 1.9 per cent in 2011, compared with a 3.2 per cent pace assumed in the 2010 federal budget last March.

Investors will be anxious to look at the accompanying statement from the Bank of Canada on Tuesday to get the central bank's latest take on the economy.

The effect on the Canadian dollar is harder to gauge since it has been rising sharply lately because the U.S. dollar has deteriorated against most currencies on the growing certainty that the U.S. Fed is ready to stimulate the economy by buying Treasury bonds, a move known as quantitative easing.

Stocks have rallied strongly on hopes the Fed would embark on a second round of such stimulus.

But the greenback has weakened since quantitative easing involves the Fed pumping more money into the U.S. economy by purchasing those government bonds, which tends to lower the value of each U.S. dollar.

The loonie hit parity last Thursday for the first time since late April but by the close Friday the currency was down to 98.83 cents US as the greenback strengthened on Friday.

Meanwhile, investors will look at earnings this week from big American heavyweights such as IBM, Apple, Bank of America, Boeing and Amazon.

The first quarterly earnings from the Canadian energy sector will also come from EnCana Corp. (TSX:ECA) on Wednesday.

Stocks were lower at the end of the week after General Electric, regarded as a bellwether for the U.S. economy as a whole, beat expectations on profits but missed on revenue.

In any event, analysts think that market momentum is bound to slow now that Bernanke has reassured markets about another round of quantitative easing.

As it is, the TSX is up about six per cent from the end of August when Bernanke initially said that the Fed remains ready to do what it takes to make sure the U.S. economy doesn't slip back into recession.

And the Dow industrial average has ran ahead about eight per cent.

"It's getting a bit stretched," said John Johnston, chief strategist at The Harbour Group at RBC Dominion Securities.

"So the news has to be extremely good to keep pushing the market higher at the rate it's been going so one would suspect that the market is probably over the next week or two or three, is probably more vulnerable to disappointment than it is to good news — just because the rally has been so extensive."

 
 
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