The Canadian Press

The Toronto stock market could see more selling pressure this week as investors weigh whether the most recent U.S. employment data will lead to a sustained economic recovery.

Worries about if some European countries can get huge deficits under control has further discouraged stock buyers and the question now is how far markets will retrace after almost a year of steady gains.

“Indicative of the employment report and a lot of the companies that were beating expectations on earnings, but missing on guidance, is this whole idea that we need to still readjust our expectations for 2010 down a little bit,” said Colin Cieszynski, market analyst at CMC Markets Canada.

“Perhaps investors had become too over enthusiastic about this year and that as reality starts to set in we’re coming back down to a level that reflects a slower recovery process, a longer and bumpier recovery process with ongoing risks to the system.”

The Toronto market ended a four-week long losing streak last week, advancing 1.16%.

But the TSX is down about 4.5% since the beginning of the year as U.S. President Barack Obama announced plans to curb risky trading by U.S. banks and China raised the reserve requirements for banks to slow lending and cool a hot economy.

Economic data on Friday showed the U.S. economy shed 20,000 jobs during January, though the jobless rate fell to 9.7% from 10%. Investors also worried whether governments, Greece and Portugal in particular, have the will to impose tough austerity measures.

The Canadian unemployment rate for January edged lower to 8.3%.

“The theme of the day at this point I think is sovereign risk and political risk,” said Danielle Park, of Venable Park Investment Counsel in Barrie, Ont.

“It’s a realization that at some point, the truth gets out and the truth is getting out in the form of we can’t slash rates any lower, can’t keep throwing hundreds of millions of dollars at this thing and, oops, the economy has actually done much worse than we even thought.”

The rally that started in early March last year has gone practically straight up, save for a modest decline in mid-summer. And, analysts agree that markets are ripe for some sort of a pullback.

“We haven’t had anything like a 10% correction, let alone the common 20 or 30 or 50% retracements you can get and we haven’t really had any of those,” said Cieszynski.

“So markets had really had a great run and they just seem tired right now. And they’re due for a correction and as I say a readjustment of expectations is the big one.”

Park maintained it is certainly possible that stock markets could retest the lows of last spring before the dust settles.

“It’s still in our range of possibilities…you just can’t say, March was the low, carry on,” she said.

Meanwhile, there isn’t much in the way of economic data this coming week to distract investors.

In Canada, there are housing starts data for January coming out on Monday while the Merchandise Trade balance comes out Wednesday. Economists expect housing starts moved up about 1.2% last month while the trade balance is expected to show a deficit of $200 million.

In the U.S., investors will take in January retail sales. The consensus calls for a rise of 0.4%.

Several large Canadian companies are also expected to report earnings.

Teck Resources (TSX:TCK.B) reports on Monday, while fertilizer giant Agrium (TSX:AGU) hands in results the following day. Air Canada (TSX:AC.A), Inmet Mining (TSX:IMN) and Talisman Energy (TSX:TLM) are scheduled to release earnings on Wednesday.

On Thursday, Manulife Financial (TSX:MFC), Sun Life Financial (TSX:SLF) and Great-West Lifeco are reporting. Investors will also pore over reports from retailers Shoppers Drug Mart (TSX:SC) and Canadian Tire Corp. (TSX:CTC.A) along with results from energy giant EnCana (TSX:ECA) and WestJet (TSX:WJA).