Investors tense up as fears of post-election gridlock rise in Canada By Reuters
© Reuters. FILEPHOTO: Liberal leader Justin Trudeau (left to right), Jagmeet Singh of the NDP, and Erin O’Toole, Conservative Leader, participate in the Gatineau, Canada federal election English-language Leaders discussion, September 9, 2021. Adrian Wyld/Pool via REUTERS
By Fergal Smith
TORONTO (Reuters) – Foreign investors are growing more worried that Canada’s federal election on Monday could result in a deadlock that hampers Ottawa’s response to the COVID-19 pandemic and further slows the economic recovery from the crisis.
The polls indicate that Prime Minister Justin Trudeau and his center-left Liberals have almost tied with the opposition Conservatives prior to the Sept. 20, vote. It raises concerns about the likelihood of no party being able form any stable minority government. The uncertainty could be exacerbated by an increase in mail-in votes, which may delay counting ballots in key electoral ridings.
Financial markets tend to view Canadian elections as if they are deciding which big party would best suit their needs. But this may be changing due to investors’ desire for a quick government to take place during a crisis.
Within hours of closing the polls, Canadian election results can be known. It is often clear who will form the government, and the policy priorities. Even if no party wins a majority of seats in the election, the results are usually known within hours.
Edward Moya is a senior analyst with OANDA New York. He stated that a result “that results in a gridlocked government will complicate the recovery going ahead, and I believe that’s why (investors) are likely to have some (investors) hesitancy before the election.”
We are in an economy recovery right now that requires everything to go smoothly.
Trudeau was prime minister for six-years and has depended on support from the New Democrats ever since he failed to gain a majority of House of Commons seats during the 2019 elections. The polls indicate that the small, left-leaning party is poised to win on Monday. With enough support they may be able to push the Liberals towards the left to keep them in power.
Trudeau’s government has spent billions of dollars to stem the fallout from the pandemic, while the Bank of Canada has cut interest rates and purchased bonds to stimulate the economy. Even though the central bank pledged to hold its key rate at a record low 0.25% for as long as economic slack is absorb, there are troubling signs.
Canada’s second quarter saw slowing economic growth and the annual inflation rate soared to 18-years highs in August. This halted the Liberal leader’s ability to make an economic case for his reelection bid.
Since Trudeau’s call for election in August, the Canadian dollar fell 1.1% to a low of 1.2650 USD, or 79.05 U.S. Cents. Speculators are now bearish on this currency, the first since December last year.
From less than 5% last August, the market’s index of expected volatility of the currency for a week has increased to about 7.5% annually.
The Toronto Stock Exchange’s S&P/TSX composite index, the country’s main stock index, fell 1.7% on Tuesday to its lowest closing level in nearly three weeks, while an index showing implied volatility for the Toronto stock market hit its highest closing value since Aug. 23.
As investors in Equities watch the election promises, they are sceptical about Trudeau’s promise to hike corporate taxes on most lucrative banks and insurance companies to pay for the costs of recovery. He also promised to limit oil and gas production immediately.
Greg Taylor from Purpose Investments, Toronto’s portfolio manager said: “If it began to lean toward a Liberal majority then I would start to sell energy and banks.”
The main opposition party the Conservatives has made a vow to improve foreign competition in the telecommunications industry. They also pledged to reduce excessive rents from rental housing. These promises could cause anxiety for real estate investment trusts.
Russil Lea is a Vancouver-based portfolio manager for Nicola Wealth. “There’s a lot more political posturing than rhetoric.” “The race appears very close and the only certainty at the moment is uncertainty about the outcome of the election.”