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Tory or Liberal? Why the markets don't appear to care

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Why markets don't care about election Financial markets have so far ignored the political uncertainty in Canada. Hey, it's not as though we're Portugal, where a debt crisis and political void have driven government borrowing costs to fantastic heights and threaten to sink the country.

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The markets aren't overly concerned at this point by who comes out on top in the May 2 federal election. True, global investors have weightier issues on their mind, such as the euro debt crisis, the devastation in Japan, and the social and political turmoil spreading through the Middle East and North Africa.

But it's also because they believe fiscal restraint will rule the day no matter who wins.

While the campaign has only just begun, and of course anything could happen, the Canadian dollar has been largely unaffected by political uncertainty in Canada. And most observers believe it will stay that way through the campaign, thought there could be a dip or a nudge here or there.

Here, for example, is how Moody's Investors Service views it:

"The Canadian federal budget presented 27 March will not pass owing to lack of support in Parliament," said senior credit officer Steven Hess in New York.

"However, any new budget introduced after elections is very likely to show a similar path toward eliminating the budget deficit by fiscal 2015-16. In last week's proposal, the ratio of gross federal debt to GDP would peak at the end of the next fiscal year and begin to decline thereafter. If, as we expect, a similar debt path is a feature of any new budget, it would be credit positive, reinforcing our view that Canada's Aaa-rated federal government finances are strong in comparison to those of many other highly rated advanced economies."

Canada, Moody's said, has been known for 20 years for low government debt debt levels, and it expects another party in power would plot no "major deviation" from the goals in Jim Flaherty's budget last Tuesday, though individual measures would change.

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"The ratio of debt to GDP fell to 29 per cent by the end of 2007-08 from a high of 68 per cent in 1996-97," Moody's said. "Most of this decline in debt occurred while the Liberal Party was in power, but it continued under the Conservatives until the financial crisis. This pattern over a long period is evidence of the consensus on the desirability of debt reduction."

Carl Weinberg, the chief economist at High Frequency Economics in Valhalla, N.Y., agreed with that assessment, telling his clients this weekend that, where budgets are concerned, both the Conservatives and the Liberals would stick to the game plan.

"All parties except the Bloc embrace the overarching objective of fiscal deficit reduction," Mr. Weinberg said.

"The bottom line in any budget from the Liberals would not differ much from the Tories', although the spending mix would be different ... For the [Canadian dollar]and the yield curve, the campaign should be a steady time, with foreign factors moving markets more than the campaign."

Camilla Sutton, currency strategist at Scotia Capital, said political uncertainty will be a "looming question," but markets have become "quite comfortable with Canadian elections, the differences (or lack of) in our parties and a minority government."

Elsa Lignos, senior currency strategist at Royal Bank of Canada Europe, said today she, too, believes political developments should have no "material imapct" on the loonie.

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"The [Bank of Canada]meeting on 31 May is likely to be fully four weeks after the election, and while it is quite possible that the political situation won't be clarified by then, it is also possible that the political situation will remain unclear three to four months from now."

It wasn't always thus. Our slideshow, based on research by BMO Nesbitt Burns senior economist Michael Gregory, shows the loonie has oft been moved, in either direction, by electioneering and its outcome.

In the 1988 campaign that centred on the Canada-U.S. free-trade agreement, for example, the loonie initially climbed 0.6 per cent, then slumped by 3.2 per cent, and then shot up again by 2.1 per cent. At the end of the day, it lost 0.6 per cent.

Primer on the election and economic issues Where the economy is concerned, this campaign comes at a delicate moment. The global recovery is fragile, Europe is grappling with a debt crisis, and the Middle East and North Africa are in the midst of an unprecedented battle for sweeping political in social change.

The backdrop in Canada is one of economic growth, a rebound in the labour market but still high unemployment, and jittery consumers still rattled by the recession and, now, by the personal debts they've built up. Personal wealth has climbed back, driven by the rebound in stock prices and house values, and the recovery is solid, though growth is expected to slow later this year. And interest rates remain low, but are expected to begin rising again.

Stephen Harper called the May 2 election Saturday, saying this campaign was all about the economy, though for his opponents there's also the small matter of ethics. It will be worth watching the major economic signals over the course of the campaign. Read our primer in Economy Lab.

U.S. jobs crisis takes its toll A stunning number from the Bureau of Labour Statistics in the United States that may have slipped under the radar, but puts the U.S. jobs crisis into perspective: 12.4 per cent of families in the United States now include one person who's unemployed.

That 2010 statistic compares to 12 per cent in 2009, and is the worst showing since the agency began collecting such numbers in 1994.

On the other side, 80 per cent of families have at least one employed member, down from 80.4 per cent in 2009.

Shuffle at CIBC Sonia Baxendale, the head of the bread-and-butter retail banking business at Canadian Imperial Bank of Commerce , is leaving the bank, The Globe and Mail's Tara Perkins reports today.

CIBC announced her departure but did not give a reason for it. Ms. Baxendale had steadily been given increased responsibilities at the bank, and was widely considered to be a top candidate to replace chief executive Gerry McCaughey when he retires.

Richard Nesbitt, who runs the bank's capital markets operations, is being given new responsibilities, which signal he's now the top contender in the succession plan.

Euro zone and Twilight Zone The euro monetary union is sinking ever deeper into the muck.

Not only are observers downbeat on the EU summit that ended Friday, but German Chancellor Angela Merkel is suffering voter setbacks.

"For quite some time the markets had expected the EU summit at the end of last week to begin to tackle some of the issues with respect to the sovereign debt problems that have been causing problems in Europe for over a year now," CMC Markets analyst Michael Hewson said today.

"Given EU leaders' predisposition for kicking the can down the road over the past 12 months, the markets somewhat naively thought that this might be the beginning of the first small steps in tackling the problems, until Portugal's government failed last week in trying to pass another austerity budget, and provoking another crisis," he said in a research note.

"With Portugal remaining in denial about its need for a bailout, the optimism that had been driving the single currency higher now looks hopelessly misplaced and weekend events in Germany could well cause further problems."

Last week, the EU summit signed off on a permanent bailout fund for the 17-member monetary union that will kick in in 2013. At the same time, Portugal inched ever closer to seeking a bailout amid a political void sparked by a parliamentary rejection of austerity measures.

Then, on the weekend, Ms. Merkel's coalition lost a key region in state elections, one it had held for half a century. She lost it to the Greens, which signals worries over her government's nuclear policy, but analysts said her European policy may have been a factor as well.

"Having lost two elections in a row in areas where there is normally strong support, there must be doubts about whether Merkel's policy on Europe has the support of the German people and this could call into question Germany's role as Europe's cash machine with respect to the bailout fund and any future agreements," Mr. Hewson said.

Carl Weinberg, the chief economist at High Frequency Economics, did a brutal weekend take on the situation in Europe, with an introduction similar to that of the old hit TV series Twilight Zone.

"No, you have not entered the Twilight Zone," Mr. Weinberg said. "Rod Serling is not on hand to end this insanity with a plausible, if somewhat sketchy, explanation of your plight. You are, instead, in Euroland, where the financial stability of the second-largest composite economy on the planet is sliding backwards - ever faster - down a steep hill. Prospects for escape become grimmer with every failed effort to regain traction."

The technical issues related to the permanent bailout fund, which would replace an existing plan, won't be completed until June, while the permanent fund is still years away.

"This is not a credible remedy for Portugal - which may need help as soon as this week - or Spain when its banks fail," he said.

Portugal, he noted, must redeem a €4.5-billion bond in mid-April and a €5-billion bond in mid-June, with only €4-billion in cash on hand. "Without a government ... default may be inevitable."

When you put it all together - soaring government borrowing costs in the periphery, Portugal's political void and Ms. Merkel's setbacks - it's hard to see a saving grace. And, said economist Martin Schwerdtfeger of Toronto-Dominion Bank, there's no real surprise that the markets are still pricing in "massive discounts" for Greek and Irish debt.

"The price of their debt suggests markets are still assigning those debt instruments a high probability of default," he said in a report today.

"Unfortunately, the expectations for a strong response to the debt crisis generated in advance to last week's European Council gathering have only been addressed through half-way measures, and this will continue to weigh on the markets."

EADS strikes Vector deal The biggest aerospace company in Europe has struck a $625-million deal for Canada's Vector Aerospace Corp. , a helicopter repair and maintenance company.

Eurocopter Holding, a subsidiary of EADS, and Vector unveiled the $13-a-share cash deal today.

"We believe that being part of the Eurocopter group will allow Vector Aerospace and our people to pursue our long history of profitable growth and excellent levels of quality and customer service," said Vector chief executive officer Declan O'Shea.

Office vacancy rates improve Vacancy rates improved in Canada's office and industrial markets in the first quarter of the year, real estate writer Steve Ladurantaye reports today.

According to CB Richard Ellis, the national vacancy rate for office space dropped to 9.3 per cent, compared to 10.1 per cent last year. Tenants leased 704,431 square feet of space, compared to 441,310 last year.

Boyd Erman's Morning Meeting

Europe's banking regulator plans a review of all bonus payments at the continent's big banks to determine if they are in line with new capital rules, Streetwise columnist Boyd Erman writes.

In Economy Lab today

Mommy Wars that pit at-home mothers against working mothers, women against women, are bitter and destructive, Frances Woolley writes.

Liberal leader Michael Ignatieff's comments on corporate taxes make no economic sense, they're just election sound bites, Stephen Gordon writes.

In Personal Finance today

This year's tax filing deadline is May 2. Here are Dianne Nice's 10 tips to make the most of your deductions and stay on the right side of the law.

The authors of 78 Tax Tips For Canadians For Dummies explain how filing a tax return can lead to free money.

How can you prepare your investments for the shocks that follow unforeseeable events? Here are a few tips from Home Cents blogger Sonali Verma.

From today's Report on Business

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