A busy week in Canadian corporate earnings is ahead but that could be overshadowed by the fast-approaching deadline for U.S. politicians to agree on a higher debt ceiling and avoid a default that would rock investor confidence.
President Barak Obama and Congress have yet to agree on crucial package that would allow the U.S. government to borrow more ahead of an Aug. 2 deadline.
If no agreement is reached, the government would be forced into a debt default that would likely send the already lacklustre economy on a downward spiral and send serious repercussions through the global financial system.
"The consensus view is that cooler heads will prevail and that there will be a package that is palatable that Congress can pass," said Paul Taylor, chief investment officer with BMO Harris Private Banking.
President Obama said Friday the U.S. has never defaulted on its debt and won't do so now.
He sought to pressure House Republicans to come around to a deal that he insisted must include new taxes as well as unpalatable spending cuts. Under the American system, both the House of Representatives and Senate must pass the same law before sending it to the president, who has power to veto it - creating a system of checks and balances that heats up negotiations on major issues.
"The market expects there will be a resolution, a positive resolution. Anything other than that will be a market mover. And that's what we're focused on, is the extent to which something other than some sort of cobbled together package winds up in fact, the market expects an agreement," Mr. Taylor said.
Uncertainty in the world's largest economy only adds to worries about sovereign debt, even as fears ease somewhat about the Greek fallout in Europe.
Last week, the European Union, along with the International Monetary Fund, reached an agreement to give Greece a second financial lifeline.
That takes huge pressure off markets in the short term by avoiding a messy debt default by Greece that could spread market turmoil as did the 2008 collapse of U.S. investment bank Lehman Brothers.
Instead, Greece's voluntary debt workout should lead to a manageable and temporary ruling of default, from which the country should emerge with lower debt, cheaper borrowing rates and a better chance of paying its way.
But debt in both the European Union and the United States, two of Canada's largest trading partners, is having a lingering effect on investor confidence.
Second quarter earnings season in Canada is set to hit its stride this week with corporate giants from a number of sectors reporting.
Investors will look for a continued rally after the main Toronto Stock Exchange S&P/TSX composite index gained 195 points, or 1.46 per cent.
Among the steady stream of earnings are reports from CGI Group , Rogers Communications Inc. , Barrick Gold Corp. , Maple Leaf Foods , Suncor Energy , and Teck Resources Ltd .
Serge Pepin, a Bank of Montreal economist, said he expects second quarter earnings will be largely positive.
"But the concerns are going forward, and the overhang from the European debt crisis, the overhang of the U.S. is really having a detrimental impact on consumers and on business alike, so what you're seeing is this malaise more than anything else."
"Like it or not, we're between a rock and a hard place because we're surrounded by problems."
Investor focus has been squarely on those debt situations, which has outweighed positive economic and corporate earnings data that continue to trickle in, Taylor said.
"But we have to get these two big macro issues behind us because they are dominating attention and that is problematic."
Pepin said odds are that U.S. lawmakers will agree on a package this week, and if they do, the focus should turn to economic data.
In the U.S., traders will see data on consumer confidence and home sales before taking in key second quarter economic growth figures. Economists expect the U.S. economy clipped along at around 1.8 per cent, similar to during the first quarter, as better trade competes with falling consumption levels.
A slow week for Canadian economic data wraps up with the release of gross domestic product data from May, which is expected to come in around 0.2 per cent growth from April's GDP.
That economic growth will be factored in to the Bank of Canada's next interest rate decision, slated for September.
Last week, the loonie briefly lift rose above 1.06 cents US - the highest level since late November 2007 - after the central bank signalled it could raise interest rates sooner rather than later. It lost steam to close the week at 105.36 cents US after Friday's inflation data showed price increases were slowing year-over-year, reducing pressure to raise rates.
But economists doubted it would be a real game changer with some predicting a rate increase as early as the next decision in September.
"It provided a defence against critics, and we were not among them, who had argued that Carney had waited too long to start tightening again," CIBC chief economist Avery Shenfeld wrote in a report.
"But we are sticking to our view that by October, the central bank will be taking the first of three quarter-point steps towards a higher overnight rate."
The central bank's overnight target rate has been one per cent since last September. It reached that level after three increases of one-quarter point each that began in June 2010. Prior to that, the key rate had been at an all-time low of 0.25 per cent for more than a year in response to the severe recession.