TORONTO - Geopolitical worries will weigh heavily on stock markets this week after a dramatic worsening in relations between Ukraine and Russia on Friday.
Stocks came under pressure at the end of the week after Ukraine's president said his country's military forces destroyed Russian military vehicles that had crossed into Ukraine overnight Thursday night.
"I think the problem with this is it has been unclear as to what the end-game is," said John Stephenson, president and CEO at Stephenson & Company Capital Management
"What to you price in? Do you price in the certainty of a pullback, do you price in the uncertainty of another incursion and where does this go?"
The development surprised traders, who had perceived a lessening in tensions after Russia had agreed to let Ukrainian officials inspect a convoy of almost 300 vehicles loaded with humanitarian aid for people caught in the crossfire between Ukraine forces and pro-Russian militias.
Markets had been further reassured after Russian President Vladimir Putin appeared to tone down his rhetoric on Ukraine, saying Moscow's goal was to "stop bloodshed in Ukraine as soon as possible."
Tensions remained over the weekend, with the Ukrainian government saying army troops had penetrated deep inside a rebel-controlled city despite having one of their fighter planes shot down by separatists.
However, the foreign ministers of Ukraine, Russia, Germany and France were expected to meet in Berlin on Sunday evening over the crisis.
Stephenson said it's clear that the situation will definitely cool buying sentiment for the time being.
"The reality is markets are probably going to take a pause, probably going to sell and lock in profits and look to reinvest at some other point in time when things are a bit more certain out there," he said.
"Right now they are definitely not certain."
The worsening in Ukraine/Russia relations comes just as a positive second-quarter earnings reporting season in Canada winds down.
"Overall, across the board, it was a good earnings season for Canada and the U.S. as well," said Craig Jerusalim, portfolio manager CIBC Asset Management.
"For the TSX, this quarter year over year we had 22 per cent revenue growth and 24 per cent earnings growth and the key there is revenue growth. Because it is no longer just share buybacks fuelling the improved earnings but it is actually top line, which is a healthy sign."
Traders are now anticipating a positive run of earnings from the big Canadian banks.
Royal Bank (TSX:RY) reports on Friday and expectations are high after the bank posted earnings of $2.2 billion in the last quarter, helped along by record earnings in its wealth management sector.
"The housing market has stayed positive . . . thatâ€™s (also) good news for the banks," said Colin Cieszynski, senior markets specialist at CMC Markets Canada.
"The banks in Canada generally are pretty steady performers; not expecting any huge surprises out of them."
Whether the steady positive results from the banks can translate into further gains for their share prices is another story, with the financials sector on the TSX already up about 10 per cent year to date.
"Yeah, the stocks have done fantastic," said Cieszynski.
"Will people take this opportunity to take some profits against the earnings? Maybe."
Meanwhile, traders will also look to the U.S. Federal Reserve for clues as to when the central bank might start hiking short-term rates. Recent economic data has been generally positive, leading to speculation the Fed could hike rates before the middle of next year, which has been widely expected.
Minutes from the most recent Fed rate meeting come out Wednesday afternoon.
In Canada, markets will digest the latest readings on retail data from June and the consumer price index for July, both of which come out on Friday.
Despite the geopolitical worries, Toronto and New York markets registered gains last week on earnings news and the belief that poor economic data from Europe and China will force central banks to step up with more stimulus. The TSX gained 0.71 per cent while the Dow industrials advanced 0.66 per cent.