This week we saw fairly stable market activity as economic data showed further improvement despite the ongoing rise in global coronavirus cases, and Canada came forward with an update on how the pandemic has impacted the country’s fiscal situation.
The number of new cases across Canada continued to be generally stable or falling as reopening measures were launched or expanded. All provinces and territories seem focused on continued monitoring and appear to be taking a cautious stance towards adopting the phases they’ve outlined to return to fully-operational economies.
The U.S. hit a grim milestone this week with confirmed cases climbing above 3 million. Southern states including Florida, Texas, Louisiana and Arizona are current hot-spots within the country. However, more than two dozen states have reported increases in daily case counts this week while infection rates as a percentage of tests administered has also increased. This recent surge in the U.S. comes as many states remain focused on keeping their local economies open. As the healthcare system becomes strained in certain regions, we expect local officials may need to balance reopening strategies with public health priorities and trying to contain many of these new outbreaks while preventing others.
Globally, many countries are also navigating the challenges associated with economic ”reboots”, with Australia re-imposing lockdown measures in Melbourne, Greece discussing reintroducing restrictions, and Serbia’s population mounting protests in response to new curfews. Brazil continues to be hard hit by the virus, as confirmed cases surged past 1.5 million earlier this week, second only to the U.S. in total number of infections. Meanwhile, in many other regions, including on the African continent, in Latin America and in India, case counts continue to grow.
Fiscal snapshot and economic data
Bill Morneau, Canada’s Minister of Finance, presented a fiscal and economic snapshot of Canada on Wednesday, sharing that the estimated federal deficit for 2020-2021 will be a staggering $343.2 billion. This marks a sharp deterioration from last December’s expectation of a $28.1 billion deficit. The government expects Canada’s GDP to plunge 6.8% in 2020 followed by a reasonable recovery of 5.5% growth in 2021.
The announced deficit is driven by many factors. Stimulus is a key contributor, with total announced stimulus spending for 2020 totaling nearly $230 billion. Lower revenues and higher expenses are also meaningful contributors, both brought on by the economic disruption from COVID-19. Alternatively, lower interest costs on public debt from interest rates that have fallen sharply, will lead to savings of approximately $4 billion.
Morneau made it clear in his update that there remains a high degree of uncertainty around the economic recovery – both the speed and the degree to which it will occur. At the current juncture, the Federal government is relying heavily on public debt to cover spending, but they will need to be careful in managing this over the months to come. While the snapshot helped provide some clarity on Canada’s current economic and fiscal situation, we would like to see more actionable guidance from the Federal government regarding how they plan to manage stimulus/aid programs in concert with the compromised fiscal position.
Despite worrisome trends in the pandemic’s resurgence in the U.S. and elsewhere in the world, economic data releases this week continue to point towards recovering activity. The U.S. ISM Non-Manufacturing Purchasing Managers Index (PMI), initial and continuing jobless claims, Eurozone retail sales, and the Canadian Ivey PMI all came in better than expected.
The improving tone to the economic data, together with cautious optimism surrounding the progress of developing a vaccine, remain key pillars supporting the “risk on” sentiment in financial markets. While markets have exhibited resilience in recent weeks, we remain conscious of several risks that could keep volatility elevated in the months ahead.
Look past the Q2 ‘Grand Canyon’ in profits
Companies are opening up their books on Q2, and yes, it’s going to be a grim quarter. But we knew this was coming. So investors should widen their range of vision, and instead look at the contours of the economic recovery and how earnings estimates for 2021 shake out.
Regional developments: Canadian consumer spending slowly recovering; Years of policy support likely from the Fed; UK pumping more money into economic recovery; China signals financial market reforms
Feel free to contact us with any questions and/or to discuss investment ideas. We appreciate the opportunity to serve you and look forward to continuing to help residents of Northern BC accomplish their long-term financial goals.