Canada Election Points to Rocky Path for Currency, Stock Markets

  • Canadians head to polls Oct. 19 with 3 parties vying for power
  • Unclear election outcomes add to struggles for S&P/TSX, loonie

Canada’s election introduces a wild card to volatile currency and equity markets as voters head to the polls Monday in a tight three-way race with little chance of a clear winner.

Incumbent Conservative Prime Minister Stephen Harper enters the final weekend with his decade-long reign at risk, trailing the Liberal Party led by Justin Trudeau. The latest polls suggest Trudeau is poised to win the most seats in Canada’s Parliament, while falling short of the 170 required for a majority. New Democrat Thomas Mulcair remains in the mix, leading to potentially fraught negotiations to form a minority government through alliance.

Stephen Harper at a rally in Ontario

Photographer: Geoff Robins/AFP/Getty Images

Canadian equities and the dollar have struggled this year amid a plunge in commodities prices, expectations of higher U.S. interest rates and slowing global growth in recent months. The multiple combinations and inherent instability of a minority government adds another element for investors to grapple with.

“Canada may face a protracted period of uncertainty in various minority government scenarios,” said Derek Holt, a Bank of Nova Scotia economist, in a note to clients Oct. 15.

The Standard & Poor’s/TSX Composite Index rose 9.13 points, or 0.1 percent, to 13,838.10 at 4 p.m. in Toronto. Canadian equities have rallied 4 percent in October after capping the worst quarterly slump in four years in September. The Canadian benchmark is down 5.4 percent this year and is the worst-performing market in the Group of Seven industrialized nations.

The Canadian dollar retreated 0.3 percent to C$1.29082 per U.S. dollar on Friday. One loonie buys 77.47 U.S. cents. A recent bout of strength has lifted the currency off its lowest point in 11 years. It has risen five of the last six weeks as prices for crude oil, one of the country’s largest exports, strengthened and the economic growth outlook brightened. The currency, also known as the loonie for the aquatic bird, is down 10 percent for the year, headed for a 2003 low.

Canadian 10-year government bonds, meanwhile, have been a source of relative stability through the volatility in the commodity, equity and corporate bond markets. The bonds are yielding 1.46 percent, up 2 basis point from yesterday’s close, and down from about 1.6 percent in the middle of September.

A victory by the NDP, which has socialist roots, would create the greatest initial sell-off in the Canadian dollar, while a Conservative win would be a “big sigh of relief,” said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc., in a phone interview.

At the same time, “any Canadian dollar sell off based on a Liberal victory would probably have me pounding my fist on the table that this would be a buying opportunity,” he said. “The implications for economic growth under their policies is rather significantly positive.”

If history is any guide, a win by Justin Trudeau and the Liberals bodes well for Canadian stocks. Stretching back to 1922 and the time of William Lyon Mackenzie King’s first term in office, stock returns have been three times higher under Liberal prime ministers than with Conservative leaders, according to monthly data to August 2015 compiled by Bloomberg from TMX Group Ltd., operator of the Toronto Stock Exchange.

Many events next week have the potential to rock financial markets. China, Canada’s second-biggest trading partner after the U.S. and a key consumer of commodities, reports third-quarter economic growth ahead of the federal election, with results of the vote not expected until late in the evening Monday. The Bank of Canada, which has cut interest rates twice already this year, will deliver its next key borrowing rate decision on Wednesday.

“There will be so much packed into next week both on the global and domestic calendars that determining sustained market reactions to any specific domestic event will be difficult,” says Scotiabank’s Holt.

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