Canadian dollar shrugs off minority government, lives to fight another day (just like the Liberals)

Briefing highlights

• Canadian dollar nears 76.5 cents
• What analysts are telling clients about the election
• Markets at a glance
• Retail sales slip in Canada
• Business sentiment improves slightly
• WeWork accepts Softbank rescue
• McDonald’s misses estimates
• P&G beats revenue estimates
• What analysts are saying today
• Required Reading

The Canadian dollar is sitting just below 76.5 US cents, shrugging off the uncertainty of a Liberal minority government, though it lost some of its shine after the country’s retail sales report.

Markets tend to dislike uncertainty but, in this case, “for various reasons, politics is not high on the agenda for the Canadian dollar,” said Adam Cole, chief currency strategist at Royal Bank of Canada in London.

Among those reasons: The fiscal differences between the Liberals and the Conservatives were “quite small,” so there was little chance of disruption.

Add to that the fact that a minority government was expected, so there was no real surprise for markets, and the fact that “Canada doesn’t really have any fiscal issues that need addressing,” Mr. Cole said in an interview.

“And we don’t have the rise of populism that we do everywhere else in the world,” he added.

Kit Juckes, global fixed income strategist and Société Générale, agreed that the currency market is “singularly disinterested” in the election results.

The Canadian dollar “has remained reasonably well supported, reflecting a risk-on, trade-optimistic, news-free market more generally,” Mr. Juckes said before final results were in but when it appeared Justin Trudeau’s Liberals would hold a minority.

“There's not much concrete news to justify trade optimism, but both U.S. and Chinese officials remain ‘hopeful' and will speak again on Friday.”

The fact that there was little difference between the Liberals and Conservatives on fiscal matters was cited by non-Canadian observers throughout the campaign.

“As the difference for both parties was some difference in fiscal policy some years down the road, it is too far for the currency market to apprehend, hence the lack of reaction of the loonie,” Sébastien Galy, senior macro strategist at Nordea Asset Management, said today.

As for wider issues, here’s what Citigroup is telling clients:

“We do not expect significant changes in the economic outlook with the Liberals likely maintaining control of government, although with more scope for direct fiscal stimulus and wider deficits,” Veronica Clark, associate, U.S. economics, at Citigroup, said in her research report.

“However, partnerships with further-left parties will could also be less supportive for the energy sector (for instance, as further-left parties have been opposed to the expansion of the Trans-Mountain pipeline),” she added.

“Ultimately however, while there is scope for a slight boost to growth over the coming year from increased fiscal stimulus, the results of the 2019 federal election do not significantly affect our base-case outlook for still solid economic activity into 2020.”

And going forward, observers don’t expect many market-moving developments, not at this point, anyway.

“While there are some residual political uncertainties, we’re not likely to see dramatic changes from the broad outlines of the Liberal platform, or for that matter, even from where policies were headed prior to the vote,” said CIBC Markets chief economist Avery Shenfeld.

“We’ll await to see more from the Liberals, and the Bloc and NDP in terms of what they will be looking for to sustain their support,” he added.

“But the results are unlikely to engender any major market reactions given that they are in line with the final polling numbers that pointed to a Liberal minority as the most likely outcome.”

Here are more comments on the election results:

“While Canada has experienced majority governments for the last eight years, minority governments are not at all uncommon. Practically, this means that there will be less clarity on fiscal policy, with the Liberals’ need for support likely to create plenty of horse trading. While any party can theoretically support the Liberals, the NDP are the consensus first choice to step up and deal, partly because many issues in the two party platforms overlap nicely. For example, both parties are in-line on the carbon tax; both are looking to crack down further on nonresident ownership in real estate; they’re each seeking to expand pharmacare; both want to cut cell phone bills; and neither sees any need to balance the budget. But, it will likely take more to earn NDP support, with the party outlining during the campaign that a wealth tax, national dental care program, elimination of subsidies to the oil sector, and waiving interest on student loans as all necessary to earn support. Of course, sentiment can change and alternative polices can be swapped, but that’s a rough initial take on what might be on the table. All told, if that’s how the support lines are drawn, the first budgets could look a lot like past Liberal budgets, but with spending commitments and deficits scaled up a few more notches even beyond those laid out in the Liberal platform ($27.4-billion deficit for FY20/21). Robert Kavcic, senior economist, BMO Nesbitt Burns

“Canadian preachiness and righteousness have been tossed aside by dispassionate markets that just couldn’t care less.” Derek Holt, head of capital markets economics, Bank of Nova Scotia

“The most natural partner for the Liberals – likely in an informal relationship – in order to govern looks to be the NDP (24 seats), with shared priorities on pharmacare, housing affordability and reducing carbon emissions. The outlook for the Trans Mountain pipeline is more uncertain than in a Liberal majority situation, but it is not necessarily a deal breaker for the NDP the same way it would have been for the Green Party and will likely be decided on in the (expected) negotiation between the two parties There is little to suggest a market reaction to the election results.” Simon Deeley, rates strategist, and Mark Chandler, head of Canadian rates strategy, RBC Dominion Securities

“The Liberals’ centre-left platform entailed tacking on about $4-billion to what was already a slightly-stimulative fiscal stance for 2020/21, delivered in part through some tax and child benefit measures aimed at middle and lower income earners. That would leave the debt/GDP ratio roughly flat, but would add a net stimulus worth a couple of decimal places as a share of GDP, and thereby very slightly reduce the need for interest rate cuts by the Bank of Canada, if a sluggish global environment persists.” CIBC’s Mr. Shenfeld

“The Canadian dollar, this year’s top performing G10 currency, saw little reaction following the election result and could see a resumption of gains against other currencies if both Canadian data continues outperform their peers and if oil prices steady.” Edward Moya, senior market analyst, Oanda

“A minority government for the Liberals and PM Trudeau is no great surprise for markets this morning, given that polling had strongly suggested this outcome was likely in the run up to the election. The [Canadian dollar] is indeed little changed form last night’s firm-ish close against the USD. We think the result itself should be more or less discounted in the spot rate.” Shaun Osborne, chief foreign exchange strategist, and Juan Manuel Herrera, foreign exchange strategist, Bank of Nova Scotia

“On its face, the Liberal election platform is marginally growth positive. If delivered, we would expect to mark up our growth forecast very slightly in the near-term, with no longer-term impact on the outlook … A key reason that $31.5-billion in net new spending commitments yields little in terms of growth impact is the current state of the business cycle. TD Economics estimates that the output gap is effectively closed, and with the core-aged employment rate at an all-time high, there are few signs of labour market slack. In this kind of environment, there is less ‘bang for your buck’ from government spending.” Brian DePratto, senior economist, Toronto-Dominion Bank

Read more

• Follow our federal election coverage
• Trudeau’s Liberals have a minority government. What now? A guide to the day after
• Robert Fife, Marieke Walsh: Federal election 2019: Trudeau survives Tory challenge, leading Liberals to re-election with minority
• David Parkinson: What a Liberal minority government means for the economy
• Don’t freak out over budget deficits (no matter who wins the federal election tonight)

Markets at a glance

Read more

• Follow our Inside the Market

Retail sales slip

Retail sales in Canada slipped in August, but volumes were on the rise.

Sales inched down 0.1 per cent to $51.5-billion, Statistics Canada said today. But if you strip out the impact of prices, sales rose 0.2 per cent by volume.

Sales at food and beverage stores dropped 0.8 per cent, falling at supermarkets, beer, wine and liquor outlets, and convenience stores. They rose at specialty food stores, however.

Ticker

Business sentiment improves slightly

From The Canadian Press: A new survey by the Bank of Canada suggested that business sentiment in the country has edged higher, but differences between the Prairies and Central Canada have grown more pronounced. The central bank’s survey of senior management at roughly 100 firms suggested “a slight improvement” in overall business sentiment as businesses expected moderate sales growth in the year to come.

WeWork accepts Softbank resuce

From Reuters: WeWork’s board has accepted a takeover plan proposed by Softbank Group, handing control of the office-sharing startup to the Japanese firm, according to a source directly familiar with the matter. WeWork owner The We Company’s board was evaluating SoftBank’s offer against an alternative financing proposal from JPMorgan Chase & Co., but decided to go with Softbank, even though the bank put together a US$5-billion debt financing package.

McDonald’s misses estimates

From Reuters: McDonald’s Corp. reported a quarterly profit that missed Wall Street estimates for the first time in two years as it invested heavily in sprucing up U.S. outlets and speeding up delivery, sending its shares down. Net income fell 2 per cent to US$1.61-billion, in the quarter from US$1.64-billion, a year earlier. On a per share basis, the company earned US$2.11 per share, missing expectations of US$2.21. Total revenue, including both U.S. and overseas operations, rose to US$5.43-billion, slightly below analysts’ expectations of US$5.49-billion.

UBS cuts jobs

From Reuters: Swiss bank UBS is axing high-paying investment banking staff after a disappointing performance at the division prompted a 16-per-cent slide in third-quarter net profit and put the group’s 2019 profit goals further out of reach.

Gulfstream unveils long-range jet

From Reuters: U.S. planemaker Gulfstream on Monday unveiled its widely-expected G700 long-range jet, in a challenge to Bombardier Inc’s flagship Global 7500 aircraft.

Berlin to freeze rents

From The Associated Press: Berlin’s state cabinet has agreed on a rent freeze for five years to counter rising rents in one of Germany’s hottest real estate markets. The German news agency dpa reported that Berlin’s left-wing coalition government wants to freeze the rent for apartments that were built before 2014. Only a minority of Berliners own their homes or apartments, and rent has been rising sharply in the German capital in recent years, forcing many to move outside the city.

P&G beats revenue estimates

From Reuters: Procter & Gamble Co. beat Wall Street estimates for quarterly revenue, powered by demand for its premium beauty brands such as SK-II and Olay, as well as healthcare products.

Renault chief aims for Nissan alliance

From Reuters: Renault chairman Jean-Dominique Senard is determined to get the car maker’s alliance with Japan’s Nissan back on track next year, he said, adding other matters such as a potential tie-up with Fiat Chrysler were less of a priority.

Hyundai may raise stake

From Reuters: Hyundai Motor said it was considering raising its stake in its underperforming truck joint venture in China, potentially joining other foreign auto makers in boosting ownership in the world’s biggest car market.

Tensions overshadow conference

From Reuters: At one of the world’s showpiece tech conferences in China, jibes at the United States for its ‘bully behaviour’ lent a Cold War tone to proceedings as trade tension once again reared its ugly head in an event that drew a dearth of top U.S. executives.

Also ...

• Under Armour founder Kevin Plank giving up CEO role next year
• International sales drive Harley-Davidson to better-than-expected profit
• Hasbro misses estimates as tariff threat bumps up costs
• UPS profit gets boost from FedEx-Amazon breakup, but COO’s retirement pushes shares down
• Just Eat rejects $6.2-billion takeover offer from South African firm

What analysts are saying today

“The odds are that [Prime Minister Boris Johnson] will win his vote on a new EU-U.K. agreement and that we will move past this difficult phase in British history. Given the intensity of the shock, it will likely take a quarter to reverse some of the shock but much as in a natural catastrophe the reversal in growth will then be quite strong above 2 per cent. The reality is that U.K. growth is actually quite decent already supported by very decent consumption courtesy of a tight labor market and that should improve going forward.” Nordea’s Mr. Galy

“The pound has been flirting with the 1.30 hurdle against the U.S. dollar on relief that Johnson-led negotiations will certainly not result in a chaotic Brexit by the end of this month. Markets price in the liklihood of a three-month extension in the Brexit deadline, with an increased possibility of inking a deal before the Oct. 31 time limit.” Ipek Ozkardeskaya, senior market analyst, London Capital Group

Required Reading

What the oil patch feared

In all the possible election outcomes, the uncertain one is what downtown Calgary had most feared, columnist Kelly Cryderman writes. It might take days or weeks to know what shape a Liberal minority government in Ottawa will take. But the fact the Liberals will be beholden to the NDP or even the Bloc Québécois to pass laws or survive confidence votes is a worst-case scenario for the oil and gas sector.

Housing markets a powder keg

Canada’s new Liberal minority government will have to reckon with big decisions on taxes and spending in a slowing economy. But it will also need to get serious about reducing risks in the housing market, columnist Rita Trichur says.

Funds team up for AltaGas Canada

Two Canadian pension funds are teaming up to acquire AltaGas Canada Inc., paying more than double the company’s initial public offering price only one year ago, Tim Kiladze writes. Public Sector Pension Investment Board, which manages the pensions for federal government workers, and the Alberta Teachers’ Retirement Fund Board are acquiring AltaGas Canada for $33.50 a share in cash, amounting to a total purchase price of $1-billion. The company went public in October, 2018, at $14.50 a share.

Trust and money

Canada’s big banks are fighting to win doctors’ trust – and their money. Clare O’Hara reports.