Briefing highlights
- How Brexit will hit home in Canada
- Markets in tailspin for second day
- Osborne scrambles to calm markets
- Video: Can you protect your job from robots?
‘Brexit wounds’
Economists, stock analysts and currency strategists are fast changing their view of the world as we head into yet another round of market uncertainty in the wake of the Brexit vote.
Britain’s decision to quit the European Union will ripple through Canada in several ways, though what we’re seeing now is the immediate aftermath, with much still in play.
“Canada’s economy will feel the effects of the U.K. vote most quickly through financial and confidence channels,” said Toronto-Dominion Bank senior economist Leslie Preston.
“It is still early days, but should financial conditions deteriorate, the economic outlook for the global economy, and Canada in turn, are at risk for a downgrade,” she added.
“A deterioration in stock market wealth and greater economic uncertainty are generally negative for economic growth.”
With markets in a tailspin for a second day, here’s how it could play out:
Canada’s economy
The impact could come via trade and turmoil, in terms of confidence.
While trade with Britain is small, as an overall share, it could still be felt. So a weaker appetite in Britain could hit us in terms of reduced demand for Canadian exports.
There’s also the issue of a further hit to commodity prices on which so much of Canada depend.
“The Canadian regions most likely to feel the brunt of reduced U.K. demand are Newfoundland and Labrador, which ships about 8 per cent of its total annual goods exports to the U.K., and Ontario, which sends about 6 per cent of its annual goods exports to the U.K.,” said Toronto-Dominion Bank chief economist Beata Caranci and senior international economist Fotios Raptis.
Bank of America now expects a mild recession that could trim imports to Britain by 5 per cent, in turn trimming economic growth in Canada by 0.06 per cent.
“Also, Canadian businesses may delay spending and investment decisions given heightened uncertainty,” said Emanuella Enenajor, the North America economist at Bank of America Merrill Lynch.
“This ’uncertainty’ drag is harder to measure, and will likely be larger than the direct trade drag,” she said in trimming her forecast for economic growth in Canada next year by 0.2 of a percentage point to 1.7 per cent.
Then there are investments back and forth.
“Based on our model simulations, we estimate that confidence and financial spillovers from a Leave result could shave about 0.5 to 1 percentage point off GDP growth for the U.S. and Canada in the second half of 2016, driven mainly by an expected reduction in business investment growth as a result of a rise in global economic uncertainty,” the TD economists said in a report.
“The negative impact on real GDP growth for Canada would be amplified if [last week’s] events foreshadow a prolonged slump in commodity price growth and any further drag from slower foreign demand.”
Stocks
Yes, Friday was bad in the aftermath of the vote. And investors are bailing out again today.
But remember that stocks had run up earlier last week in anticipation of a Remain victory.
As things stand now on a comparative basis, Canadian and U.S. markets appear “favourable on the global stage,” said BMO Nesbitt Burns senior economist Robert Kavcic, adding that investors now see the Federal Reserve hiking interest rates possibly later than expected given the uncertainty following the referendum.
“Looking back to the 2011-12 European crisis, North American equities were struck by some volatility, but at the end of the day ran according to their own domestic script,” Mr. Kavcic said in a report titled “Brexit wounds,” citing some differences between then and now.
“All told, North American equities may hold up just fine, but there’s less wiggle room to deal with shocks at this stage of the cycle.”
Matthew Barasch, Canadian equity strategist at RBC Dominion Securities, believes Toronto-listed stocks will feel the pinch given the “significant commodity exposure” of the exchange.
Canadian banks aren’t all that exposed, he said, but will still probably be hit for two reasons.
“1. Interest rates are likely to fall in the wake of Brexit, compressing net interest margins,” Mr. Barasch said.
“2. Fears over financial contagion and potentially further exits from the euro zone could take hold for a time.”
Canadian life insurance companies would similarly be affected by low interest rates, he added.
While energy companies are not directly exposed to the region, the “stronger U.S. dollar and potential concerns over global growth are likely to weigh on commodities at least in the near term,” Mr. Barasch said.
A couple of auto parts companies – Magna International and Linamar – are actually directly exposed, so watch what could happen there.
And while Canadian railways aren’t, they could be affected by the global economy, said Mr. Barasch, adding that RBC expects growth in Britain to ease by between 2 per cent and 4 per cent in the next three years.
Some sectors could benefit, though, including utilities, real estate investment trusts, and telecom and consumer staples companies.
“Lower rates should help flows into the more rate-sensitive sectors, while consumer staples have become the go-to defensive group for Canadian portfolios over the past few years.
Housing markets
The uncomfortable situation in Vancouver and Toronto could become that much thornier in three ways.
Already, policy makers are trying to come to grips with the surge in prices that has put home ownership out of reach for so many, and sparked widespread concerns over record household debt levels.
Cheap borrowing has, of course, been a culprit here. But undocumented purchases of Canadian real estate by foreign buyers are also believed to be playing a role.
Remember, those foreign buyers get an automatic discount because of the weak Canadian dollar.
On the first point, Brexit could suppress sovereign bond yields, thus holding down Canadian mortgage rates lower for longer, extending the timeline for cheap money.
“Also, with the Canadian dollar falling in a risk-off environment, housing becomes cheaper to some foreign buyers,” said Bank of America’s Ms. Enenajor.
Add to that the many questions about London’s future as a global financial hub.
“Foreign capital in search of real housing assets may increasingly settle in Vancouver/Toronto now that London looks riskier,” Ms. Enenajor said.
Just sayin'
Markets hit
European markets are taking it on the chin again this morning, and New York is set for another weak open.
“The selling pressures continued with the weekly opening bell as the political atmosphere has turned sour after a weekend of discomfort across the United Kingdom,” said London Capital Group market analyst Ipek Ozkardeskaya.
Asian markets didn’t fare too badly, though, with Japan’s Nikkei gaining 2.4 per cent, and the Shanghai composite 1.5 per cent. Hong Kong’s Hang Seng lost 0.2 per cent.
In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were down by between 1.8 and 1.9 per cent as North American markets were getting up and running, and also falling.
The British pound was also whacked again amid the Brexit uncertainty, and the Canadian dollar traded in a range of 76.4 cents (U.S.) to 77.2 cents.
Osborne weighs in
Britain’s Chancellor of the Exchequer acknowledged today that the country’s economy will be impacted by the decision to pull out of the European Union, but indicated he will remain in place to help mitigate the fallout.
“Britain is ready to confront what the futures holds for us from a position of strength,” George Osborne said.
Mr. Osborne’s comments came as the British pound fell about 2 per cent and investors braced for more market turmoil, The Globe and Mail’s Paul Waldie reports.