Canadian Stocks and Dollar Fall, Bonds Rally After Brexit Vote

  • Great-West Life, Concordia lead declines as gold rallies
  • Canadian dollar pares loss to drop most since January 2015

Canada’s currency fell with its stocks while bonds rallied after Britain’s decision to secede from the European Union spurred concern the global recovery will falter.

The yield on the Canadian government 10-year bond fell 13 basis points to 1.163 percent as investors sought refuge in fixed income. The country’s currency declined 1.85 percent to C$1.3012, after earlier falling the most in six years. The S&P/TSX Composite Index dropped 1.7 percent, less than most global stock indexes, as a gold rally limited declines.

"I went to sleep confident and woke up looking, what happened here? It was totally unexpected," Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto.

On a day when the surprise vote rattled global markets, Canadian assets fared relatively well. The loonie was the sixth-best performer among global currencies, while the equity decline was among the smallest in major markets.

“We are well positioned to weather global market uncertainty as we have done in the past,” Prime Minister Justin Trudeau said in a statement from Ottawa. Trudeau was expected to speak later today in Quebec.

The Bank of Canada, meanwhile, said the Group of Seven central banks are monitoring the situation closely. The Brexit vote may push back any rate increase into the fourth quarter of 2017, BMO Capital Markets economists said in a research note Friday. The vote also rules out a July increase by the U.S. Federal Reserve, they said.

Trading in the swaps market suggests a 21 percent chance of a Bank of Canada rate cut in October, from just 7 percent Thursday.

The U.K. was Canada’s fifth-largest trading partner last year, accounting for about $21.2 billion in total trade, according to data compiled by Bloomberg. That compared with more than $540 billion in cross-border commerce with the U.S., Canada’s largest partner by far.

Canadian firms most exposed to the European market include Brookfield Asset Management Inc., CGI Group Inc. and Great-West Lifeco Inc.. Other firms with relatively large exposures include software company Open Text Corp.; plane and train maker Bombardier Inc.; aircraft simulator maker CAE Inc. and engineering firm WSP Global Inc.

An index of the 19 Canadian companies most exposed to Europe dropped 3.6 percent, more than twice the drop of the main gauge, led by Great-West, Concordia Healthcare Corp. and Bombardier.

Crude also fell, with the price for West Texas Intermediate dropping 4.9 percent, the biggest decline in four months. That may weigh on the Canadian currency, traders said.

"We envision the Canadian dollar could weaken by up to 5 to 6 percent over the coming months based on the fact that this is a large-scale shock for global growth," Bipan Rai, head of foreign exchange at the Canadian Imperial Bank of Commerce in Toronto, said by phone. "That’s not good for our export picture and our currency may bear the brunt of that pain."

Potential Risks

Collectively, less than 3 percent of the S&P/TSX company revenue is derived from the U.K., according to Ian de Verteuil, a Toronto-based analyst with Canadian Imperial Bank of Commerce who created a Brexit index to track Canadian stocks most tied to the vote. For the year to date, the 19 so-called Brexit stocks have lost 0.3 percent, compared with the 6.8 percent gain for the benchmark S&P/TSX Composite Index.  

"We have undertaken an in-depth analysis of the potential risks to our businesses, and notwithstanding the potential for increased market volatility and uncertainty that may arise, our businesses are resilient and we maintain significant financial flexibility, " said Paul Mahon, chief executive officer of Winnipeg, Manitoba-based Great-West, said in a statement. Great-West, which has been in the U.K. since 1903, remains committed to Europe, Mahon said in the statement.

Aimia Inc., the Montreal-based loyalty card company, which owns and operates Nectar, the largest loyalty program in the U.K., said the decline in the pound against the Canadian dollar would be unlikely to have material mid-term effects on the the company’s financial results. The pound was down 6.56 percent to C$1.7743.

Strong Opinions

“The pressure on gross billings and operating costs from our U.K. business when the pound falls is counterbalanced by a reduction in costs related to global product development work that is also done in London," said Rupert Duchesne, group chief executive at Aimia.

Jason Russell, chief investment officer at Acorn Global Investments in Oakville, Ontario, said the firm, which manages about C$260 million ($199 million), reduced its risk ahead of the referendum though the result was still a shock.

"Look, everyone walked into this thing last night knowing Remain was going to win," he said. “Everyone felt that 12 hours ago. Strong opinions will get you in trouble.”

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