Foreign investors are becoming more and more concerned that Canada’s federal elections on Monday could result in a stalemate that hampers Ottawa’s response to the COVID-19 pandemic and further slows economic recovery from the crisis.
Polls show that Prime Minister Justin Trudeau’s center-left is largely linked to the opposition’s conservatives ahead of the September 20 vote, raising the prospect that no party will be able to form a stable minority government itself. Adding to the uncertainty is an expected increase in vote by mail that could delay the counting of ballots in some important options.
Financial markets generally see Canadian choices from the point of view of which of the major parties would be most friendly to investors, but this trend may take a back seat this time to the desire to quickly get a government in place in a crisis.
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The results of Canadian elections are typically known within hours of the polls closing. Even when no party has won a majority of the seats, it is usually clear what forms the government and what the general political priorities will be.
A result “leading to a deadlocked government will complicate the recovery in the future, and I think that’s why you’re likely to see some (investor) hesitation ahead of the election,” said Edward Moya, senior market analyst at OANDA in New York.
“Right now we are in the midst of an economic recovery that needs everything to be in order.”
Trudeau, who has been prime minister for six years, has relied on the support of the new Democrats since failing to win a majority of seats in the lower house in the 2019 election. the better Monday, with enough support perhaps to force the Left to tilt to the left if they want to remain in power.
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The Trudeau government has spent billions of dollars on curbing the fallout from the pandemic, while the Bank of Canada has cut interest rates and bought bonds to stimulate the economy. Although the central bank has promised to keep the key interest rate at a record low of 0.25% until the economic weakness is absorbed, worrying signs have appeared on the horizon.
Canada’s economic growth slowed in the second quarter, and annual inflation rose to a high of 18 in August, taking some of the wind out of the sails of the liberal leader’s economic argument for re-election.
The Canadian dollar has fallen 1.1% to around 1.2650 per dollar. US dollar or 79.05 US cents since Trudeau called the election in mid-August, and speculators have turned bearish to the currency for the first time since December last year.
The market’s target for expected volatility of the currency over a one – week period, a time frame covering the election, has risen to an annual interest rate of around 7.5% from less than 5% in August.
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The Toronto Stock Exchange’s S & P / TSX composite index, the country’s most important stock index, fell 1.7% on Tuesday to its lowest closing level in almost three weeks, while an index showing implied volatility for the Toronto stock market hit its highest close since August. . 23.
Equity investors are taking a nervous look at some of the parties’ campaign promises, including Trudeau’s promise to raise corporate taxes on the most profitable banks and insurance companies to help pay the cost of recovery and his promise to end oil and gas emissions immediately.
“If it started leaning toward a liberal majority, I would start selling energy and banks,” said Greg Taylor, a portfolio manager at Purpose Investments in Toronto.
There is also nervousness over a promise from the Conservatives, the main opposition party, to increase foreign competition in the telecommunications sector as well as a promise from the Liberal Party to curb excessive profits from rental housing, which could hurt real estate investment.
“There’s a lot of political stance and rhetoric,” said Russil Lea, a portfolio manager at Nicola Wealth in Vancouver. “The race looks very tight and the only certainty right now is uncertainty about how the election will go.”
(Reporting by Fergal Smith Editing by Denny Thomas and Paul Simao)