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Traders to focus on earnings reports from wide variety of Canadian corporations

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TORONTO - Traders will turn their attention to a slew of earnings spanning several sectors this week but expectations are muted for the resource stocks that make up such a large portion of Canada's markets.

The Toronto Stock Exchange finished last week up 223 points or 1.8 per cent, the fourth consecutive week of increases. The S&P/TSX composite is now up two per cent for the year to date.

The TSX and other markets have found lift from a steadily improving U.S. economic climate, seen most recently in a strong U.S. manufacturing report and data that signalled job creation has done better than expected.

Earnings at U.S. companies have also, for the most part, shown more positive surprises than disappointments.

Andrew Pyle, senior wealth advisor and portfolio manager for ScotiaMcLeod in Peterborough, Ont., observed that three-quarters of U.S. companies that have reported so far have beat earnings expectations.

"We’ve actually seen decent activity in the U.S.," Pyle said. "But in Canada we see a different environment."

A large part of that difference is that the Canadian market is dominated by resource and financial stocks and these are not good times for the mining and energy sectors.

"I wouldn’t expect fantastic earnings out of the resource sector in the second quarter," said Patrick Blais, managing director and portfolio manager at Manulife Asset Management.

"A lot of the underlying commodities continued to drop and that will impact the revenues as well as the bottom line earnings."

Blais said China is a big source of the headwinds facing resource companies as the world's second-largest economy slows. More importantly, he said, the composition of the country’s growth is changing.

He said China is shifting away from capital intensive growth to more service and consumer-led growth "and that will have a serious impact on the demand for base metals."

Teck Resources (TSX:TCK.B) is the biggest Canadian mining company to report this week and analysts forecast the Vancouver-based company will post adjusted earnings of 33 cents a share on Thursday, down from 53 cents a year ago.

Its stock has been badly battered, falling to about $24 from the 52-week high of $38.13 that was established about a year ago.

Gold miner Agnico-Eagle Mines reports after markets close on Wednesday and expectations for that sector are minimal as well, as bullion prices have their own particular sort of pressure.

"At the end of the day, gold is an inflation hedge or it’s a safety trade," said Blais.

"And there is no indication of inflation in the market with respect to the safety trade given the stability. There is no real reason to hold gold at this time so we expect the gold price to remain under pressure and for gold equities as well to be challenged by a declining gold price."

The consensus calls for Agnico Eagle to post eight cents per share of adjusted earnings, excluding options expense, compared with 40 cents in the second quarter of 2012.

Agnico Eagle traded Friday at about $29, a far cry from its 52-week high of $56.99. But then the TSX Global Gold index has tumbled about 44 per cent so far this year.

In the energy sector, traders will receive earnings reports from Cenovus Energy (TSX:CVE) and Encana (TSX:ECA) on Wednesday and Husky Energy (TSX:HSE) on Thursday.

Outside of the resource sectors, grocer Loblaw Cos. Ltd. (TSX:L) reports results Wednesday. The company, which last week announced it is buying Shoppers Drug Mart (TSX:SC) in a $12.4 billion cash and stock deal, is expected to hand in earnings of 58 cents per share of adjusted earnings, which would be up from 56 cents in the comparable quarter last year.

Other companies reporting earnings this week include Canadian National Railways (TSX:CNR) on Monday and Canadian Pacific Railway (TSX:CP) on Wednesday.

The lowered expectations for earnings follow generally disappointing first quarter earnings.

Statistics Canada has reported that corporations earned $74 billion in operating profits in the quarter, down 1.2 per cent from the previous quarter.

"I think the quarter will be lacklustre, don’t expect strong positive surprises," added Blais.

"But that said, we’re setting up ourselves for better second half mainly based on a rebounding U.S. economy."

It is a relatively quiet week for economic news.

The major Canadian data point for the week is May retail sales, which comes out Tuesday morning. The consensus calls for a 0.3 per cent rise following a 0.1 per cent rise in April.

In the U.S., economists are looking for healthy home sales data for June. Existing home sales are expected to rise 1.4 per cent from May to an annualized rate of 5.25 million. And new home sales are expected to climb 1.7 per cent to an annualized rate of 484,000 even as higher U.S. bond yields translated in higher mortgage rates.

Further evidence of a strengthening manufacturing sector is expected to be reflected in the June durable goods orders report. Economists anticipate to see orders go up by 1.1 per cent amid rising aircraft sales. Excluding transportation, orders are expected to rise by 0.5 per cent.

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