The surprise announcement of a referendum in Greece to evaluate the terms of the latest bailout package for that country is likely just the start of the worries investors will face in coming weeks, TD Economics says.
In a new report, TD says that while a new plan to address the eurozone’s sovereign debt problems and encouraging economic data out of the United States helped to fuel a market rally in late October; it suspected that the good times wouldn’t last. “Markets were bound to re-awaken to the still daunting fiscal realities in Europe and they are likely to experience renewed worries over the U.S. economy in the coming weeks,” it says. “The announcement of a Greece referendum is just the start of the re-evaluation of risk.”
TD allows that the chance of renewed recession in North America has ebbed since the summer, but points out that expectations for economic growth over the next year are still very subdued. Moreover, it stresses that the fiscal challenges facing both Europe and the U.S. have not been solved, and are likely to fuel further market volatility.
“Europe’s sovereign debt crisis may be the biggest risk facing markets, but fiscal crisis on this side of the Atlantic could also re-emerge,” it warns, noting that the Joint Select Committee that is seeking $1.5 trillion in savings over the next 10 years must get its proposed cuts approved by Congress by December 23. “If last summer’s debt-ceiling drama is any indication, this may not go smoothly, and the market response to that scenario could be severe,” it says.
That said, it expects continued modest growth in North America, continued low interest rates, and predicts that yields will essentially move sideways in the coming months, albeit with considerable volatility. And this will impact the Canadian dollar too, it says. TD notes that the Canadian dollar traded briefly above par after the European fiscal plan was announced, only to be sent lower when the Greek referendum was declared. “We expect that kind of market volatility to continue, weighing on the loonie,” it says. “We see the Canadian dollar reaching a ‘low’ over our forecast horizon of 92¢ U.S. in Q1, before appreciating back above parity again in the second half of 2012.”
And it says that commodity prices face a similarly rocky road too. “Modest economic growth in 2012, and still solid demand from emerging markets should help keep a floor under commodity prices next year, but the big upswing we have seen since the recession looks largely in the rearview mirror,” it says.
“Unfortunately for investors overdue for some smoother sailing, the outlook calls for the hatches to remain battened down. The volatility in financial markets is far from over,” it says. “The challenges in Europe are going to take time to be sorted through, and there will be bumps along the way. Pre-election political wrangling in Washington could also weigh on sentiment. And, while there is certainly greater reason for optimism on the North American economy than there was one month ago, investors should brace themselves for some strong squalls in the coming months.”
Separately, CIBC World Markets predicts that, “Ongoing fiscal jitters and two quarter-point [European] rate cuts should weigh further on the euro in the coming year, and given ongoing risks to financial stability, investors would be wise to further underweight exposure to the region and highly exposed institutions.”