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Confusion reigns in the markets as investors struggle to figure out which events and indicators will define the next cycle and which are red herrings to be ignored.

The list of potential catalysts and sparks keeps growing. Fears of a European debt crisis seizing up interbank lending, for example, have expanded to include worries about German austerity measures extinguishing an early economic recovery. Investors may hope for some clarity out of the G20 summit that begins this week, as well as an announcement from the U.S. Federal Reserve on Wednesday. In the meantime, gold is likely to keep its shine and stocks will attempt another delicate climb forward on low volume.

Economic fundamentals remain on track for a broader recovery, says Roland Chalupka, chief investment officer and portfolio manager with Fiduciary Trust Co. of Canada. But now is not a good time to buy, he advises.

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He draws some confidence from the fact that the jobless rate has steadied, that interest rates remain extremely low and that global credit markets have held up to Europe's woes. But even though he believes the economy is turning around, he remains cautious. "As investors, we have to pay attention to price," he says. "We are now really looking for the right price to add risk."

He considers stock prices too high right now and wants the markets to shed between 10 and 15 per cent off their peak valuations reached in April. That translates into a buying range on the S&P/TSX composite index of somewhere between 11,090 and 10,474. On Friday, the index ended the week at 11,928.


Gold will continue to grab investor attention this week, as nervous uncertainty defines broad sentiment. Analysts are looking at the rising price of the precious metal with some bewilderment, because stock markets have also managed gains in the last seven trading sessions. Normally, gold prices climb as traders lighten their risk exposure, betting on bullion as a safe haven. Mr. Chalupka recognizes that gold prices will likely continue to climb, but he has avoided exposure to bullion in his portfolio. "Our safe asset is Canadian bonds. They are far less volatile and they pay you an income," he says.

The Fed's announcement midweek on the federal funds target rate and brief comments on the economy may give investors a better sense of clarity. It is a challenging moment for the U.S. central bank, as indicators suggest the economy is losing some momentum and as worries about deflation grow.

"We are now running the risk of too much government belt tightening," Sherry Cooper, chief economist at BMO Nesbitt Burns, said in her weekly note Friday. Her comments echo a growing concern among economists and some politicians that the recovery is precarious and vulnerable to deficit hawks turning off government stimulus too early, especially in Europe where Germany is embracing austerity measures.

The issue of how best to nurture the recovery will likely dominate the G20 meeting in Toronto late this week. "Our highest priority in Toronto must be to safeguard and strengthen the recovery," U.S. President Barack Obama said in a public letter to the other G20 leaders. Expect disagreement among governments about the need to keep the pump primed versus the necessity of reining in spending to get deficits under control.

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