Investors are waking up to the prospect that the New Democratic Party's surge in opinion polls could alter Canada's political landscape on Monday, but so far the impact on global markets has been muted.
Polls since last Friday have shown Jack Layton's NDP on the verge of a historic breakthrough, and that's generating buzz among analysts of the Canadian economy. Some say they are fielding calls from foreign investors seeking perspective on the potential effects of a stronger-than-expected showing by the left-leaning party. Ten-year Canadian government bonds dipped slightly on Wednesday, a hint of some unease about the increasingly unpredictable election.
Still, the Canadian dollar stayed well above parity, climbing to a three-year high against its U.S. counterpart because of bigger factors such as the U.S. Federal Reserve's decision to keep borrowing costs at record-low levels and finish its controversial bond-buying program on schedule. And despite pockets of concern, analysts say investors are likely confident that none of the parties vying for power would jeopardize Canada's key selling points in recent years - oil wealth, a healthy banking sector, a strong recovery and, perhaps most important, an almost religious commitment to balanced budgets.
"The feeling is that in Canada there is a strong consensus for a fiscal balance, and any party that comes and threatens to change that will pay the price," Charles St-Arnaud, a foreign exchange research analyst at Nomura Securities in New York, said in an interview. "If anyone came in and tried to change that dramatically, you can easily imagine that at the next election, they would be completely dismissed."
Mr. St-Arnaud said he has had questions from some clients about the NDP's surge in Quebec, and acknowledged that a second-place showing by the party would cause some initial uncertainty among investors who don't follow Canada closely, and possibly a "quick sell-off" of bonds or the Canadian dollar. However, once it's clear that any new government is still committed to eliminating the deficit, any apprehension in markets would probably dissipate, he said.
In addition, he noted, markets would probably be happy to see any party gain support at the expense of the Bloc Quebecois, since that would suggest there's less risk of another sovereignty referendum.
Camilla Sutton, a currency strategist at Scotia Capital in Toronto, said while markets never like uncertainty, international investors view the differences among the various party platforms as "somewhat minor," which is why any concerns about an NDP-led opposition - or the outside chance of a coalition government led by Mr. Layton - are minimal.
"What we're talking about here is a minor difference between party platforms and potential fiscal outlook, and outlook towards the corporate sector," she said.
Indeed, the scope for fundamental change is not even in the same ballpark as elections that threatened to bring sovereigntists to power in Quebec, or referendum campaigns that threatened to lead to the breakup of the country. For example, with the 'Yes' and 'No' sides essentially tied 10 days before the 1995 Quebec sovereignty referendum, spreads between Canadian and U.S. long-term government bonds were widening and economists were sending notes to clients warning that the potential uncertainty from an indecisive result could cause a nationwide recession.
Mr. Layton, meanwhile, clearly understands the need to reassure investors so there is nothing that Conservative Leader Stephen Harper or Liberal Leader Michael Ignatieff can point to in the final days before the vote as evidence that markets are jittery about the NDP's rising fortunes.
On Tuesday morning, BMO Nesbitt Burns' No. 2 economist Doug Porter caused a stir when he wrote that the poll numbers hint at a result that would be "not exactly market-friendly." Mr. Layton countered Wednesday on the campaign trail that an NDP-led government - should his party win enough seats to try and form one - would be careful to ensure "very stable and predictable conditions for business," and pointed to the fiscal record of NDP governments in provinces like Manitoba as proof that his party is committed to living within its means.
Investors might shrug off a strong NDP showing in any case. Even Mr. Harper's Conservatives, have been known to disappoint markets with less-than-laissez-faire moves such as the decision to block the Potash Corp. of Saskatchewan takeover bid last year.
"There's political risk everywhere," said Stephen Gordon, an economist and professor at Laval University in Quebec City, citing the Potash decision. "Foreign investors are likely to look at this with a more jaundiced eye. I mean, people are still willing to buy Greek bonds, for Pete's sake." Stefane Marion, an economist at National Bank Financial in Montreal, said he is skeptical that the NDP's poll numbers will translate into enough new seats for the party to become the government. Even if that were to happen, though, Mr. Marion surmised most investors are aware that in Canada, fiscal probity crosses party lines.
"From a financial-market perspective, somebody voting on the left in Canada is still very different from somebody voting on the left in Europe," he said.