Heavy haulers at a Suncor oil sands mine. Suncor is one of many energy firms reporting this week.
A flurry of earnings reports this week will provide the first tangible evidence of the impact of a slowing world economy on Canada.
While markets have braced themselves for weaker results, management guidance regarding future growth will be scrutinized closely by economists and analysts. Stock prices are likely to react strongly to any signs that the current global economic soft patch will persist into next year.
"We've seen a lot of potential weakness in the earnings already flagged over the past month," said George Vasic, chief economist for UBS Securities Canada, "but if weakness continues, we'll have to take a closer look at 2013 forecasts."
Falling prices for many commodities, notably oil, copper and coal, are among the primary sources of anxiety. Canadian investors hope for indications that the declines – a sign of slowing manufacturing activity in China and other emerging markets – are a temporary phenomenon. Further weakness would threaten the outlook for the broader domestic economy, potentially signalling the end of the emerging-markets growth trend that has provided tremendous benefits to Canada over the past decade.
Corporate financial results may also shed some light on the impact of the worst North American drought in 50 years. Corn prices have jumped because of expectations that drought conditions will result in lower crop yields.
That has increased demand and prices for fertilizer, which should lift the outlook for Potash Corp. of Saskatchewan Inc. when the company reports on Thursday. But depressed crop yields are bad news for Canadian National Railway Co. and Canadian Pacific Railway Ltd., which will announce earnings on Wednesday. A poor harvest could reduce railcar loadings in the fall, lowering revenues.
The energy sector will be in the spotlight, beginning with Suncor Energy Inc. on Tuesday, followed by Cenovus Energy Inc. and Encana Corp. Wednesday, and Canadian Oil Sands Ltd. Thursday. Crude prices tumbled 22 per cent during the second quarter while a modest rise in natural gas prices provided a dash of good news for industry profits.
Bay Street will be watching closely for an update on a developing move toward natural gas among U.S. power producers. Driven by rising coal prices and new environmental legislation, electrical utilities are converting power plants to natural gas from coal, increasing natural gas demand.
Nexen Inc. provided a disappointing precedent for oil patch results last Thursday, reporting earnings well below analyst expectations. However, Greg Pardy, co-head of global energy research at RBC Dominion Securities, notes that Nexen's poor results are not necessarily a negative indicator for the sector because there are major differences among oil companies in terms of cost structure and production mix. Nexen's operations in the North Sea and west Africa are markedly different from Suncor's oil sands facilities.
The mining sector will see reports from several key players, including Sherritt International Corp., Goldcorp Inc. and Teck Resources Ltd.
The decline in the copper market and the steep slide in global coal prices are expected to take a bite out of Teck's bottom line. Coal inventory continues to pile up in China, depressing prices, while proposed environmental legislation has pushed U.S. coal demand lower.
Scott Barlow