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Investors look for direction as market prepares for worst month of the year

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TORONTO - Stock markets could be in for some tough sledding in the near term as investors contemplate trading in a month that sports a nasty reputation.

"Historically, September is the worst month of the year for stocks," said Colin Cieszynski, senior markets analyst at CMC Markets Canada.

"Usually, what happens is you have a correction in May/June, you get a rebound in July, earnings season gives it a summer boost that carries you into the first part of August, so you start to see things roll over second half of August."

At the same time, stock markets are looking a bit tired with indexes in New York and Toronto at or near record highs thanks to a better than expected second-quarter earnings season and a string of data pointing to a strengthening American economy.

"And that’s why people are being a bit more cautious," added Cieszynski.

"Nobody really wants to take on any new positions. At the same time, they’re not running for the exits either."

There are also concerns that a more robust U.S. economy could persuade the Federal Reserve to hike interest rates ahead of expectations. Markets have generally expected the Fed to move short-term rates away from near zero around the middle of next year.

And that's one big reason why the big economic event of this week is the release of the U.S. government's employment report for August on Friday.

Economists expect another month of strong job gains above the 200,000 mark.

"We’re looking for a 225,000 gain," said Doug Porter, chief economist at BMO Capital Markets.

But it's not just job gains the market is looking for. Fed chairwoman Janet Yellen has said she is also worried about slack in the labour market and that's why people will be digging deeper into the data, with emphasis on the participation rate, which has been in a percentage in the low 60s.

"The participation rate has stopped falling (and) its counterpoint, the employment to population ratio, has been finally grinding higher over the last year or so," said Porter.

"The U.S. labour market is finally turning the corner and, quietly, the last six months have seen the strongest job gains over a six-month period in eight years."

Canadian jobs data also comes out on Friday.

The Canadian economy created 42,000 jobs in July. That was a revised number as Statistics Canada said a reporting glitch was behind its original report that only 200 jobs had been created that month.

Porter said he isn’t expecting much for August as "we have had this up/down pattern in Canadian employment for the past eight months and it’s the turn for down this time."

"We’re pencilling in a small gain just because we do believe the underlying trend is erratically higher and I can’t think of any major special factors during August to lead to an outright decline — but the risk is there."

The other major event of the week happens Wednesday when the Bank of Canada makes its scheduled announcement on interest rates.

The key rate will stay at one per cent, where it has been since September 2010.

Central bank governor Stephen Poloz has maintained a dovish accent on rates and the markets, which generally expect a rate hike mid-2015, will look to the bank’s statement for any change in tone.

But, like the Fed, the Bank of Canada wants to make absolutely certain the economy can handle the weight of higher short-term interest rates.

"I think the bank wants to have plenty of evidence that exports really are responding to the U.S. economy before it would have any effect on policy and they may well let the recovery really run before they seriously consider raising interest rates," said Porter.

The Toronto and New York markets registered minor gains for last week. TSX advances were led by consumer staples, industrials and telecoms. But the market was held back by the financial sector, down 1.15 per cent despite a steady parade of earnings news from the big Canadian banks that largely beat expectations.

Stock prices for the big banks were at or near record or 52-week highs as the results started to come out a week ago and the financial sector is still up 11 per cent year to date.

"They’ve had huge runs," said Cieszynski.

"They weren’t good enough to encourage another round of buying so people just thought, fine, I’ve made enough money I’m going to move on to something else for awhile."

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