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Traders cautious ahead of a flood of U.S. second- quarter earnings reports

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TORONTO - Traders will likely be cautious heading into this week, looking for reassurance about U.S. economic strength from a flood of American corporate earnings coming out this month.

Resource company Alcoa Inc. kicks off the second-quarter earnings season Tuesday while banking giant Wells Fargo posts results on Friday.

Also during the week, traders will look for hints as to the pace of future interest rate hikes from the release of the minutes Wednesday of the latest meeting of the U.S. Federal Reserve.

And the Canadian dollar could find even more lift from the release of June employment data at the end of the week.

North American markets had a solid week with the TSX rising 120.71 points or 0.8 per cent to record highs while the Dow Jones industrials gained 216 points or 1.28 per cent and closed above 17,000 for the first time.

Canadian miners in particular benefited from strong manufacturing data from China and the U.S. last week. But markets also found lift from June U.S. jobs data that blew past expectations and raised hopes that the contraction in the economy in the first quarter was due to severe winter weather and that gross domestic product should take off in the April-June period.

Investors hope strong earnings numbers will reinforce those hopes.

"Second quarter should be better in terms of growth and I think most people expect that," said Andrew Pyle, senior wealth adviser and portfolio manager at ScotiaMcLeod in Peterborough, Ont.

"And I think a lot of people expect that that growth will translate into better earnings or better than expected earnings in terms of what may have been expected when we kind of grinded through the first quarter and earnings forecasts for the second quarter probably were pushed down a bit."

Alcoa is particularly anticipated because the company is viewed as an economic bellwether by virtue of the fact that its aluminum products are used in so many applications.

"It not only reflects the underlying commodity of aluminum but the demand for products that are either semi-finished or finished which, in turn, is a pretty much directly correlated to economic growth," said Bob Gorman, chief portfolio strategist at TD Waterhouse.

"So, for that reason, you sort of look to Alcoa to reinforce the idea that you are seeing accelerating (economic growth) and I think that's what we will see. So it will probably start the season on a pretty solid note."

Analysts look for Alcoa to post earnings per share of 12 cents, up sharply from seven cents a year ago.

Wells Fargo, on the other hand, is viewed as a proxy for the health of the U.S. housing sector as it is the country's biggest mortgage lender.

"That’s why I like Wells Fargo in recent years on my short list because it is a direct play on the U.S. housing recovery," Gorman said.

"It will be interesting to see how well their numbers hold up after the uneven performance on the housing side in recent months."

The bank is forecast to post earnings of $1.01 a share, up slightly from 98 cents US a year ago.

Meanwhile, the Canadian dollar is entering the second half of 2014 at almost the 94-cent US level, close to its highest point for the year so far and much to the discomfort of the country's exporters.

Those elevated levels could be tested Friday when Statistics Canada releases June employment data. The agency is expected to report that about 24,000 jobs were created last month compared with 25,800 in May, with the jobless rate remaining unchanged at seven per cent.

Analysts observe that the dollar’s rise from 89 cents US earlier in the year is due to a number of reasons, including rising inflation, data suggesting the outlook for exporters is improving, a better American economic climate and rising oil prices.

"Together these are all fundamental improvements for (the Canadian dollar) and accordingly dampen the likelihood that CAD weakens materially from here," said Camilla Sutton, chief FX strategist, managing director, Scotiabank Global Banking and Markets

Traders will also take in the release Wednesday of the minutes of the latest Fed interest rate meeting. But analysts expect they will be more interested in the minutes from the next Fed meeting taking place July 30. That's because the blowout June employment report has raised a fresh round of speculation that the Fed could move to raise rates before mid-2015, as had been widely expected.

"So the minutes will probably be disregarded in light of the jobs report — it's old news," added Pyle.

"People say, let’s get to that Fed meeting (later this month) and find out what these guys really think about jobs growth."

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