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at the bell

Richard Drew

The climate has shifted for stock markets in recent weeks. We have seen stable conditions return after a couple of years of great drama. World events, whether perceived positively or negatively, no longer send stocks gyrating in one direction or the other. Greece's sovereign debt crisis, for example, which had threatened to destroy the euro currency, has been resolved to some degree in the past few days without delivering major shocks to investors.

We now have what market experts call a sideways market, where indices trade in a relatively narrow range, struggling to break through critical top and bottom barriers. Put another way, there are no new great influxes of cash fuelling stocks, nor is their any great exodus of funds. The market is stable, but the rally is tired.

"The market is anticipating the normalization of liquidity conditions," explains Ashraf Laidi, chief market strategist with CMC Markets, an international retail trading firm.

Governments and central banks around the world have begun turning down the spigot that pumped trillions of dollars into economies to fight off the Great Recession. That cheap money helped power last year's market burst, and as governments tighten policy, that easy money gets taken away, he says.

Rising rates are going to hurt stocks, gold and other commodities in the short term, but also give some lift to the U.S. dollar, he predicts. Mr. Laidi expects bullion could dip to $970 (U.S.) an ounce, silver to $14 an ounce and a barrel of oil could slide to between the high $60s and low $70s.

Last week, the yield on U.S. 10-year Treasuries briefly topped 3.9 per cent, the highest level in 10 months, as investors' growing confidence in the recovery led them to seek higher-yielding assets. The rise also signalled investors' concern over the U.S. government's ballooning debt.

As expectations grow for higher rates, it's important to keep in context what kind of hikes we'll see. The "normalization" of monetary policy is about getting real interest rates back to zero. Right now we face negative real interest rates, where inflation of 1.5 per cent far exceeds savings rates. The U.S. Federal Reserve and other central banks aren't about to begin a drastic tightening of monetary policy. In fact, the new normal will be relatively low interest rates globally, Mr. Laidi says.

Economic data this week will likely offer further evidence that the slow recovery phase is under way. Today, we get a read on the strength of the U.S. consumer as the Commerce Department releases its monthly personal income and outlays data. Economists expect a 0.1-per-cent increase in personal income, while spending is expected to climb 0.3 per cent. That will be followed Wednesday by the Conference Board's monthly assessment of consumer confidence.

Also on Wednesday, Statistics Canada reports the gross domestic product for January, with economists forecasting growth of 0.5 per cent from December, lifted by manufacturing and retail.

It's a shortened trading week with markets closed on Good Friday, but in the U.S. the Labor Department will issue its March jobs report at the end of the week. Economists expect the unemployment rate to remain unchanged at 9.7 per cent, and the creation of 190,000 new jobs, including 150,000 temporary census jobs.