Skip to main content

The Canadian economy is export oriented and resource rich, so it’s no surprise that the S&P/TSX Composite Index has been sensitive to changes in global trade activity. In recent years, the relationship between Asian trade volume and the TSX has been particularly close.

The news from that front has not been great, threatening the recent rally in Canadian equities.

The most widely used benchmarks for global and regional trade are compiled by the Netherlands Bureau for Economic Policy Analysis (CPB). The first accompanying chart shows the year-over-year change in the CPB World Trade Index and the annual change in the S&P/TSX Composite.

Story continues below advertisement

For much of the past decade, the rate of change in global trade activity was far lower than the domestic equity market. From early 2018 to August, 2019, however, dips and recoveries in trade activity were generally matched by equities in a much more pronounced fashion.

The past three months have seen the S&P/TSX move higher while the global trade index continued to deteriorate. The year-over-year decline in trade has fallen to levels last seen in 2009.

The performance of domestic equities has tracked Asian trade volumes much more closely than global trade as a whole, as the second chart highlights. China is the primary reason for this, as the dominant source of demand for the majority of the world’s commodities. Even if domestic miners and energy producers don’t sell directly to Asia, Chinese demand determines commodity price changes that affect their profit growth.

Asian trade volume is declining in year-over-year terms because of the U.S.-China trade dispute and the resulting tit-for-tat tariffs, but is not at decade lows like global trade. The same divergence on the second chart is apparent – Canadian equities have been stronger than trade data suggest they should be.

The divergence is likely to close in 2020, in one of two ways. The positive scenario is for trade data to improve – the blue line (in both charts) will climb to meet the S&P/TSX’s growth path. Any partial resolution of the U.S. tariff issues would be extremely helpful in this regard. U.S. President Donald Trump said on Tuesday that the country and China were close to agreement on the first phase of a trade deal. In the meantime, new U.S. tariffs are supposed to take effect on Dec. 15.

The risk for investors is that the expected rebound in trade that has helped push markets higher fails to materialize. Peter Oppenheimer, chief global equity strategist at Goldman Sachs, warned of this scenario in a Tuesday research report. Mr. Oppenheimer said that his company’s global economic growth forecast predicted modest gains for 2020, but that “a good deal of this prospective recovery has already been reflected in the strong equity rebound,” creating the distinct possibility of negative surprises.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies