Weekly Letter: A Perspective on the 2020 Financial Markets

Sep 25, 2020 | Warren Andrukow


Weakness in global markets has continued to persist. A laundry list of items were to blame this week, including a number of U.S. monetary policymakers who pleaded for Congress to pass more fiscal stimulus, concerns over the potential of a contested U.S. election, a noticeable slowing in European services activity, COVID-19 case trends and the potential for more government restrictions. Market volatility did move modestly higher recently though remains below the levels of early September when weakness first emerged. This suggests market action remains orderly.

All the issues listed above are worthy of further discussion, but we focus our commentary this week on a virus update as it remains the predominant driver of the global economic and market trajectory in our view. We also address the implications of the throne speech from the Canadian government.

Coronavirus Update

The rate of new infections in Canada continued to accelerate over the past week with the country seeing its 7-day moving average surpass 1,100 versus 800 the previous week. From a provincial perspective, Quebec and Ontario remain the hot spots, with the fastest growth rates. The average of daily new infections in both provinces is approximately 460 and 386, respectively. British Columbia and Alberta also saw an increase, but the rate of change is well below the other two provinces. Meanwhile, Saskatchewan and Manitoba were relatively stable in terms of change in trend. The east coast and northern territories have generally seen no pickup whatsoever compared to the rest of the country.

Elsewhere, developments have been mixed. Europe continues to grapple with its second wave. Argentina and Israel are reporting near record levels. And, the United States has seen a stalling in its declining trend, though it appears to have flat lined as opposed to move higher.

But, some signs of progress have emerged in developing countries such as Brazil and India. The former has seen its new cases steadily decline since August, with well below 20,000 new cases per day now being reported. And India, whose case numbers seemed out of control just a few weeks ago (at more than 90,000 cases per day) has seen its moving average noticeably decline over the past week. The figures remain elevated but the trends provide some glimmers of hope for these hard hit nations.

The Implications of Our Government’s Plan

The minority Liberal government delivered its much anticipated throne speech this past week. Given the emergence of a second wave of the coronavirus in Canada, it was not necessarily surprising to see a heavy focus on the various programs put in place to continue to support the unemployed and businesses that are being impacted by the pandemic in order to buy more time for the economic recovery. Interestingly, there was a change to one particular program (explained below), which may be enough to secure the support from the NDP party. If the Liberals want to survive a parliamentary confidence vote in the days to come, they will need the NDP given the Conservatives and Bloc Québécois have suggested they are not likely to be supportive.

The support programs include:

  • Canada Emergency Wage Subsidy – extended from December through until next summer, essentially pays a sizeable portion of an employee’s salary for eligible businesses.

  • Canada Recovery Benefit – available for 26 weeks to workers who are self-employed, gig, or contract workers. Was initially promised to be $400 per week but was raised to $500 in an attempt to secure support from the NDP party.

  • Canada Recovery Sickness Benefit – applicable for those that do not have paid sick leave, will provide $500 per week for up to 2 weeks.

  • Canada Recovery Caregiving Benefit – applicable to those that have to stay home to care for someone because alternatives are not available due to the pandemic, will provide $500 per week for up to 26 weeks.

In addition to the above, some changes were made a month ago to the Employment Insurance (EI) program that should allow more people to quality. This is important as many participants of the Canada Emergency Response Benefit, which is on the verge of expiring, are likely to transition to EI.

There will be concerns about the cost of these programs as the fiscal deficit was already expected to be the largest this year since the Second World War. Moreover, the government will be funding this spending with increasing amounts of debt. But, these measures are undoubtedly required to help the many households and businesses endure through this period of economic stress. Austerity and fiscal restraint will come at some point in the future. Canada won’t be alone in confronting that longer-term challenge as most other countries have had to undertake similar spending to deal with the impact the pandemic has had on their own economies.

We are likely to turn our attention from Canada to the U.S. and its presidential and congressional elections. The first of three presidential debates takes place soon (September 29th) and the noise could last longer than it otherwise would as there is some risk of a contested outcome. We will discuss this more when we publish our next commentary over the following week.

Market Decline and Recovery Results

The peak-to-trough numbers for the current market decline and subsequent recovery are provided in the table below, as of today’s closing prices. This week, markets were up slightly in Canada, the U.S., and the Emerging Market countries, while countries in Europe and the Far East were down marginally.