A brief semblance of stability in stock markets melted away on Friday, ending a disastrous week for North American equities, as the signs of economic carnage wrought by the fight against the coronavirus pandemic started to come into view.
The S&P/TSX Composite Index ended the trading day down 2.6 per cent, while the S&P 500 index dropped by 4.3 per cent, capping off the worst week for Canadian and U.S. stocks since 2008, each having lost 14 to 15 per cent.
Despite a wave of central bank stimulus, many billions in new government spending aimed at saving jobs, and a potential bailout for the oil patch, a dramatic slowdown in the Canadian economy is already underway. Around 500,000 Employment Insurance applications over just the last week is evidence of mass layoffs.
“These developments are too formidable to be fully offset by policy stimulus,” wrote Jean-François Perrault, chief economist at Scotiabank.
Canadian energy stocks initially led a market rally on Friday morning after reports that the federal government is preparing a $15-billion support package for the sector, which has been decimated by the twin spectres of the COVID-19 crisis and plunging crude oil prices.
But the global oil market resumed its descent on Friday afternoon, as West Texas Intermediate dropped by 11 per cent on the day to settle at US$22.53 per barrel.
Crude futures have now declined by 64 per cent since their January peak. Demand for oil is fast eroding as the sweeping lockdowns and quarantines mandated around the world spawn a potentially brutal recession that economists are scrambling to quantify.
On Friday, New York Governor Andrew Cuomo said he would order all “non-essential businesses” closed and their workers to stay at home. This followed on the heels of California’s unprecedented statewide “stay at home” order issued late Thursday.
Meanwhile, hope for a resolution to the oil price war between Saudi Arabia and Russia dwindled after Moscow rejected U.S. intervention in the dispute.
The collapse of crude prices has devastated the energy component of the Toronto Stock Exchange, which has declined by 70 per cent just since the start of the year. Going back to the sector’s last major peak in 2014, the S&P/TSX Capped Energy Index has lost more than 85 per cent of its market value.
A relatively heavy weighting in energy stocks has made for a particularly severe sell-off on the Toronto Stock Exchange.
Friday was the one-month mark since the Canadian stock market last registered a record high on Feb. 20. In the chaotic month that followed, the domestic benchmark index dropped by 34 per cent, wiping out more than $1-trillion in market capitalization.
A flood of stimulus by central banks globally has so far failed to contain the panic. In addition to rate cuts and trillions in planned asset purchases, six major central banks - including the Bank of Canada - announced a coordinated action on Friday to enhance liquidity in the U.S. dollar by increasing the frequency of their currency swap operations.
“This is straight from the 2008 playbook,” Paul Moroz, chief investment officer at Mawer Investment Management, said in an e-mail. But, he added, “it doesn't address getting money to Main Street.”
To that end, all of the G7 economies have announced or are preparing fiscal stimulus packages.
On Wednesday, Prime Minister Justin Trudeau detailed $27-billion in emergency spending, as well as $55-billion in tax deferrals, to help business weather the shutdowns and keep workers on the payroll.
“It’s critical to ensure that a tidal wave of insolvency doesn’t destroy the corporate sector you will need to drive the recovery,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report.
“In 2008, it was the financial sector that needed some patching up. This time around, energy producers, airlines, and an array of other non-financial businesses are in the same straits.”
Government spending, however, has also proven incapable of putting a floor under Canadian equities, Canadian oil, which fell to a historic low below US$8 a barrel on Wednesday, or the Canadian dollar, which is trading below US$0.70 for the first time in more than four years.
The containment measures required to flatten the curve on coronavirus infections ensure that a severe economic slowdown is taking hold. U.S. GDP growth is expected to fall by 8 per cent in the second quarter, while in Canada the decline will be closer to 11 per cent, Mr. Perrault said.