Friday November 28, 2014

QUESTION OF THE WEEK

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Investors look to U.S. data for indications economy can withstand rate hikes

TORONTO - The Toronto market is set to advance this week as traders looked to new data to reinforce the view that severe winter weather didn't cause long-term economic damage and that the U.S. economy should be able to handle a hike in interest rates in 2015.

The week's data includes the latest readings on U.S. durable goods orders, new home sales and consumer confidence.

No major Canadian economic reports are scheduled.

Both and Toronto and New York advanced last week even as markets were surprised when the U.S. Federal Reserve said it could start raising short-term interest rates as soon as next year.

"I think people were surprised because you always get people who think, the Fed will keep easing forever," said Colin Cieszynski, senior markets analyst at CMC Canada.

"Well, they donít."

But in the wake of that dash of cold water, a couple of reports improved investors' view of the economy.

The Conference Boardís index of leading indicators, an indicator of future economic activity, rose in February by the largest amount in three months. And a key manufacturing reading, the Philadelphia Fedís manufacturing index, rebounded in March from a negative reading in February.

"They were fantastic," Cieszynski said.

"Weíre seeing the (weather) affected areas bouncing back into March; they have some really good momentum heading into the spring."

The major report of the week is the U.S. durable goods report for February, which comes down Wednesday. Economists expect orders to have risen by 0.8 per cent last month following a one per cent dip in January.

New home sales for the U.S. are expected to come in at an annualized pace of 445,000. But economists expect a decline from January's strong reading of 468,000 sales. Some economists think the drop could be even steeper owing to the weather.

On Tuesday, traders will also take in the Conference Board's reading on consumer confidence, while the University of Michigan releases its key confidence index on Friday.

Traders will also be keeping a wary eye on developments in the Ukraine crisis.

Moscow formally annexed Crimea on Friday after residents there voted in a hastily called referendum last Sunday to leave Ukraine and join Russia. Ukraine and the West have rejected the vote, saying it was held at gunpoint since Russian troops had seized control of Crimea two weeks earlier.

After that invasion, markets sold off for a day but quickly recovered as it quickly became apparently that the West wasn't planning a military response. Sanctions have been applied against Russia since then but they have been targeted at individuals, not the Russian economy as a whole.

Still, Cieszynski said he was "amazed" at the restrained reaction that markets have had to the crisis.

"It seems like everybody wants to keep looking past and saying, 'oh, itís over, itís done,'" he said.

"Well, itís not over. There is still a lot of complacency out there about situations around the world and whenever something flares up we see the markets get knocked down but then the money keeps coming back in and just props it back up."

Worries about Chinese growth and Ukraine had depressed markets the previous week but the TSX ran ahead last week by 108 points or 0.76 per cent, held back by sliding gold stocks while the Dow industrials advanced 237 points or 1.48 per cent.


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