Minority government fails to spook markets

(June 29, 2004) Defying the polls predicting a Conservative win, Canadian voters returned Paul Martin to 24 Sussex Drive last night, albeit with a fragile minority government which has promised much to the electorate.

“Pollsters are starting to make economists look good,” says Marc Levesque, chief fixed income strategist at TD Securities. “I think everyone was expecting a much tighter race than this — we’re not all that far from a Liberal majority.”

It’s commonly held that investors shy away from unstable, minority governments, but that does not seem to be the case this morning, after the ruling Liberal party topped the Conservatives by 36 seats. Polls leading up to the election had predicted a much closer result, so perhaps the final tally came as a comfort to foreign investors.

“As far as the markets go, they’ve barely budged,” says Levesque. “The bond market is roughly unchanged from where it was yesterday; the Canadian dollar actually opened the day a bit stronger, has weakened since then and is little changed since yesterday’s close.”

He says the slight downturn in the dollar has nothing to do with the election, but is rather the result of a positive consumer sentiment report released this morning in the U.S., driving the greenback higher.

“What the markets care about the most is the overall fiscal situation,” he says. “Fiscal prudence has become a mantra in this country — even the NDP is proposing balanced budgets. It’s not that much of an issue.”

A research note on the RBC Economics Web site supports the TD economist’s view.

“As markets had long been expecting a minority outcome, the reaction has been muted,” said economist Ivana Rupcic in the RBC Economics daily economic update. “This reaction seems warranted as the fiscal plans on a go-forward basis are premised on a balanced budget plan. As such, Canada is unlikely to see major changes in fiscal policy.”

But while the new government may claim to prefer balanced budgets, Levesque says debt reduction will likely lose its place as a Liberal priority. The goal of reducing the debt to 25% of GDP will be “off the front burner,” since the government will often require the support of the NDP and the Bloc Quebecois—both left-leaning parties.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com