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Stocks in for more pressure, buying sentiment pressured by geopolitical worries

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TORONTO - Stock markets are likely in for tough slogging again this week as traders grapple with uncertainty caused by escalating geopolitical troubles in Ukraine, Iraq and Gaza.

"I think we’re dealing with some complex issues," said Jean-Francois Dion, portfolio advisor, Wealth Management, RBC Dominion Securities.

"There are no easy solutions here and we will likely be dealing with these situations for awhile here."

The Toronto market ended last week more or less flat, down 19 points, which still left the TSX up 11.56 per cent year to date. The Dow industrials ended the week with a gain of 61 points or 0.37 per cent amid reports Friday afternoon that Russia had ended military exercises on its border with Ukraine.

But the rally that capped Friday trading left many market-watchers unimpressed.

"Nothing has changed, it was all technically driven on a Friday afternoon in the summer," said Colin Cieszynski, senior markets analyst at CMC Markets Canada.

"It’s more short-covering and less exuberance. You just had people shorting (the market) throughout the week and they were just closing out positions before the weekend."

Russia is the biggest geopolitical concern for two reasons.

There are worries that Russia could actually invade its neighbour if it appears that Ukrainian rebels supported by Russia are in danger of collapsing under the onslaught of Ukrainian military forces.

"Oh, the minute we see headlines on the screen that Russian soldiers have moved into Ukraine, it’s game off. It’s basically what everyone is afraid of and it is what is being baked into the markets," said Andrew Pyle, senior wealth advisor and portfolio manager at ScotiaMcLeod in Peterborough, Ont.

But also casting a pall over sentiment is the worry about the effect of sanctions and countersanctions on a fragile European economic recovery.

Concerns about economic strength in the region increased last week in the wake of data showing that Italy slipped technically into recession during the second quarter. And German industrial orders fell and industrial production rose only 0.3 per cent in June, less than expected.

Investors worry about how the data could worsen in future quarters as it reflects the effects of sanctions. Russia moved last week to retaliate against Canada, the U.S. and European Union by blocking shipments of food from any country that has levied sanctions against it.

"The effects are real," Pyle said. "Ukraine, at the end of the day, changes a lot of the variables out there significantly."

As far as the damage that the sanctions regime will cause to the Toronto stock market, Pyle said it's not a matter of individual sectors getting hit, but rather a malaise that would affect the entire market.

"If we are impacting agricultural production in Canada, yeah, there will be less demand for fertilizer, less demand for equipment that tills the land and so forth," he said.

"But really, the impact on the stock market is going to be more the general impact just from the tension."

There could also be a silver lining for the TSX since the market could benefit from gold stocks rising alongside bullion prices as traders opt for safety.

Adding to market jitters going into the weekend was Iraq, where American warplanes bombed Islamic militants.

The airstrike came after President Barack Obama on Thursday authorized U.S. airstrikes in northern Iraq, warning they would be launched to defend American troops and civilians under siege from Islamic State militants.

On top of this, there was a breakdown in the ceasefire between Israel and Hamas in Gaza.

The TSX decline came despite what was a generally positive run of earnings reports last week.

"We‘ve seen a very decent earnings season, both from Candian and U.S. companies, some fairly upbeat guidance at least in most sectors, and generally some better than expected numbers," said Dion.

"These numbers on the whole have been welcomed positively from investors but most of that has been overshadowed by the geopolitical component here."

The earnings season has pretty much wound down and now investors are looking ahead to next week when the big banks start to post quarterly results.

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