The announcement of a minority government for the Parti Québécois in Quebec was shrugged off by markets Wednesday.
While there were some concerns leading up to the election over how the markets would react to an election win for PQ leader Pauline Marois, immediate response to her minority government indicates there will be little change for the Canadian dollar and bond spreads.
George Davis, chief technical strategist on the fixed income and currency strategy team at RBC Dominion Securities, called the election a “non-event” when it comes to currency movement. “Going into the elections the polls were pointing to a PQ minority, and that’s what we got,” he said. Since that scenario was already priced in leading up to the vote, the reaction was muted.
The loonie closed at $1.0092 (U.S.), down 0.52 of a cent from Tuesday’s close of $1.0144.
Quebec’s Liberals did perform a little better than the market was expecting based on the polls, which may have added balance to this result. And since the PQ claimed just 54 seats – nine short of a majority position – the party will be unlikely to gain momentum on hot-button issues such as a referendum on Quebec independence and increased social spending. “To a large degree that has neutralized the result from a currency perspective,” said Mr. Davis.
On the bond desk, the results were similarly predictable. “There’s a little comfort in the fact that with a minority government they will have a muted ability to make some of the more significant changes that they were projected to implement,” said Brian Calder, a bond trader at Bissett Investment Management in Calgary. He says he doesn’t expect the results to have much impact on the bond market.
“Quebec has a reasonable plan to eliminate their deficit. And with the minority PQ, they’re going to have to be friendly with their colleagues in the national assembly,” said Mr. Calder.
That said, we may see some positive change for Quebec bonds Wednesday, even if it’s a small change in the scheme of things. “Quebec is outperforming [Canada yields] today on the back of the results,” said Joey Mack, director of fixed income at GMP Securities. “Not by a lot– it’s a small move–but the flip side of that is going into the election they didn’t move that much either. I think the market was prepared for a PQ minority.” He notes that Quebec’s 10 year bonds are two basis points tighter than yesterday as compared to Canada bonds.
Leading up to the Tuesday election, there was some broadening in the spread of Quebec’s provincial bonds to around 15 basis points, when compared to Ontario’s bonds. Today around 9 a.m., the spread widened to about 18 basis points. When the election was called on August 1, that yield was hovering at around 7 points.
Now that the election has passed, and market predictions have materialized, currency experts say that investor eyes have already turned to Bank of Canada governor Mark Carney, and today’s Bank of Canada interest decision to leave the overnight rate steady at 1 per cent.
And beyond Canadian interest rates, the PQ minority win has been completely overshadowed by Thursday’s European Central Bank meeting. Uneasy investors anticipate that President Mario Draghi will aim to tackle the euro zone’s debt crisis with new policy measures and bond buying activity, but since there’s some doubt that this announcement will come tomorrow, European shares to edged downward in Wednesday trading. “Markets appear increasingly nervous,” noted Camilla Sutton, Chief Currency Strategist at Scotiabank, in a report this morning. “Equities are slightly weaker, bond yields are mixed and the U.S. dollar is stronger.”