Heigh ho, Heigh ho it’s off to work we go…
It was an eventful week. Stocks rallied hard today after an unexpected surge in US jobs. In addition, many were focused on the social unrest that permeated across the United States. As a result, there was less attention paid to the pandemic and state of the economic recovery. This week, I’ll take a look at developments on both fronts, and also discuss the noteworthy move in the Canadian dollar.
Coronavirus update
A second wave of the coronavirus has been a concern since the beginning of this pandemic. Unfortunately, the risks of such an occurrence, particularly in the U.S., have increased. The mass protests across the country have resulted in a sharp unwind of the social distancing behaviour that had existed across many American cities in recent months. There is no guarantee of a rise in infections once the incubation period expires in a week or two. In fact, should no spike in new cases ensue, it could suggest the transmission risks have declined, and lead to further easing of restrictions and act as another positive catalyst for stock markets. But, the mass gatherings have created multiple opportunities for the virus to spread and re-emerge as a more serious risk. While markets do not appear very concerned about this, I believe it is something that bears watching.
The rebounding economy
Millions of people have lost their jobs across North America over the past few months. But, markets tend to be less concerned about what’s recently happened and more focused on the future. In other words, it’s the change in trend that is more important for investors. And the change has been positive. Weekly jobless claims for example have now declined for nine straight weeks in the U.S. and there have been early signs of certain jobs coming back as indicated by the recent employment reports out of the U.S. and Canada. This suggests some of the job losses may only be temporary in nature.
The economic rebound is not just a North American phenomenon as monthly services and manufacturing data across China and much of Europe this week showed evidence of improving over the past month. Much work remains, but the overall trend is improving, rather than deteriorating.
The rise of the loonie…or the fall of the U.S. dollar?
The Canadian dollar had quite the week, breaching the $0.74 level for the first time since the beginning of March. But, its move higher may have more to do with the global recovery than with what’s transpiring domestically. While the U.S. dollar has fallen relative to the Canadian dollar, it has also depreciated against other major currencies too. And just as the U.S. dollar strengthens during periods of crisis as investors flock to it for its relative “safe haven” status, it can weaken as investor concern fades and risk appetite rises. I expect the weakness in the U.S. dollar may continue in the weeks to come barring any setbacks in the health crisis. But looking out beyond the next few months, Canada’s domestic challenges – high consumer debt loads, lack of pipeline capacity that exacerbates depressed energy prices, and weaker overall competitiveness levels - remain structural headwinds that may limit any sustainable move higher in the loonie.
Overall, I am encouraged by the broadening rally across equities and currencies, which suggests growing confidence in the economic recovery.
Tim