Stock markets are in for a challenging week as indices trade above January lows, despite growing signs of weaker consumer demand.
"The evidence is starting to look pretty good that those late January lows have a good chance of holding," said John Johnston, chief strategist at RBC Dominion Securities' Harbour Group in Toronto.
"But we're probably going to be in a long, grinding base-building pattern with the risk of new lows because the 20 per cent bear market decline we've seen in the S&P 500 is very much like the '90-'91 bear market, which was a 20 per cent decline and a similar credit background."
Yesterday, European stocks rose on speculation about possible new investment in the banking sector, while Asian markets were mixed and North American exchanges closed for holidays.
London's benchmark FTSE 100 rose 2.75 per cent to 5,946.6, while Germany's DAX index gained 2 per cent to 6,967.55 and the Paris CAC 40 added 1.9 per cent to 4,861.80.
"It seems to be a combination of factors," said Keith Bowman, a broker at Hargreaves Lansdown Stockbrokers in London. "There was press speculation over the weekend that banks reporting this week may raise their dividends and possibly sovereign investment funds will increase their investments."
U.S. financial markets observed Presidents Day, while the TSX and TSX Venture Exchange were shut for Ontario's first Family Day.
North American stock markets eked out a slight gain last week despite a litany of more bad news. The TSX is 8.9 per cent above its Jan. 21 low while the Dow is still up just over 3 per cent from its most recent low the following day.
Last Thursday, U.S. Federal Reserve chair Ben Bernanke told the Senate Banking Committee that business prospects have worsened and predicted the economy will grow at a "sluggish" pace before recovering later in the year and that banks' mortgage investments could lose more value.
And the next day, worries about the ability of consumers to hold out deepened after the University of Michigan consumer sentiment survey for January came in at 69.6 – much lower than the expected reading of 78.
"The consumer is softening here and this drop in sentiment tells me that it tracks quarterly spending growth pretty well and it's telling us the consumer is very soft," said Johnston.
"And when you look at it, their asset prices are falling – housing, now their equity portfolios are down, gasoline prices are up, OPEC is talking about cutting production and a lot of people still have jobs, but they're more nervous," he added.
Adding to investor woes was an announcement from consumer-electronics retailer Best Buy, owner of the Future Shop chain, that it will earn less than expected in fiscal 2008 due to weak January sales.
There was some good news at the end of the week.
"The labour market isn't crumbling like it often does when you seem to be sliding into recession," Johnston noted. "Like those jobless claims, usually in this kind of environment we would be spiralling towards 400,000 (a week). Now, they're just kind of meandering up towards 400,000 right now."
Quick action by the U.S. Federal Reserve Board to cut interest rates has also buoyed markets since the January trough. The central bank has cut its key funds rate by 1.25 percentage points since then and Bernanke reassured investors the Fed would cut as warranted.
Japanese stocks were flat yesterday, while Hong Kong shares sank amid concerns about further monetary tightening in China.
But Chinese stocks jumped after securities regulators approved new wealth management operations, regarded as likely to increase sales of shares to the public. The Shanghai composite index gained 1.58 per cent to 4,568.15.
Tokyo's Nikkei index edged up 12.84 points to 13,635.40. Market observers said it may take a while for the Nikkei to resume a stable upward trend even though current levels are above the January lows.
Hong Kong's blue-chip Hang Seng index lost 1.6 per cent to 23,759.25, after gaining 6.8 per cent in the previous four sessions.
Analysts said traders were cautious due to concerns about the U.S. economy. The latest inflation data for the U.S. is due next week, but Johnston doesn't think they will derail rate cut expectations.
"The big issue for most people is the economy – inflation is not the main issue right now," he said.
"The issue is how you manage inflation after the economy turns around."