Market Watch: Oct. 25

In Canada, the TSX finished slightly lower on Tuesday as investors weighed the prospects of a minority Liberal government. On Wednesday, the TSX finished in the red, dragged down by key telecom names, which are encountering revenue headwinds as unlimited data plans take hold with consumers. However, the TSX was up slightly on Thursday, buoyed by the materials and tech sectors.

Turning to interest rates, most analysts surveyed are expecting the Fed to ease U.S. rates next week for the third time since July. However, it’s looking less likely that Canada’s central bank will cut rates over the coming months, as the domestic economy continues to be resilient.

In currency news, the loonie edged higher against the greenback on Monday, hitting a new three-month high. While the Canadian dollar weakened Tuesday after domestic data showed a surprise drop in retail sales for August, the loonie steadied on Thursday, hovering above the 76-cent mark (US).

Markets – U.S. Markets Up Slightly; TSX Flat

For the four days covered in this report, the Dow added 35 points to close at 26,805, the S&P 500 rose 24 points to settle at 3,010, while the tech-heavy Nasdaq climbed 96 points to close at 8,186. In Canada, the TSX was fairly flat, losing 8 points to end at 16,369.

Equities/Strategy

Strategy

Equity market impact from social and fiscal policy of Canada’s new government– Canadian Prime Minister Justin Trudeau won a second term Monday night and maintained enough seats to possibly form a coalition with the New Democratic Party (NDP). The Liberals could rely on the support of any other party to pass legislation and survive confidence votes, but many observers have noted the NDP is the party most ideologically aligned with the Liberals.

Deficit spending is poised to continue in Canada’s 43rd Parliament, as new investments and tax cuts will ramp up from about $4bn next year, FY21, to $9bn by FY24. Voters appeared undeterred by the prospect of further deficit spending, particularly in light of the relatively small deficit, when compared to peers, a low federal debt load, and the current low interest rate environment.

The NDP and Liberal platforms both include generous spending commitments, centered on the welfare of low- and middle-income Canadians through affordable housing initiatives, childcare, health, pharma, and dental care, and tax cuts for lower brackets. These measures may translate to a small boost in confidence and consumption. However, the effects are likely to be limited given slowing global growth and high external risks.

The NDP proposed raising the corporate tax rate to 18% from 15%, revamping Canada’s electric grid – which might present opportunities for utilities – and investing in the auto, aerospace and forestry sectors in an effort to create jobs.

So far, equity markets have taken Monday’s results in stride, and the S&P/TSX Composite was little changed on Tuesday following the election. However, markets may reserve judgment until the Liberals flesh out their governance plans and table a budget.

(Bill Curry)

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Market Watch: Oct. 25

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