Markets ignore Parti Québécois victory…for now

The financial sector has ignored the Parti Québécois’ victory in Quebec. After Pauline Marois’s narrow win, the credit spread between the debt of the Government of Quebec and Ontario stood at 16 basis points.

This is significantly higher than the average of the past ten years, which is around 10 points, “but this is normal in the case of a minority government,” says Stefane Marion, chief economist and strategist at National Bank.

This type of gap is nothing new. We observed a similar one in March 2007, when Charest’s Liberals took power. “This is a risk premium due to the minority government,” adds Marion.

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Between Tuesday evening and Wednesday morning, the Canadian dollar fell just $0.006 against the U.S. dollar. “This slight decline is due more to the rate maintenance announced by the Bank of Canada [Wednesday morning] than the election of the Parti Québécois,” says Denis Durand, senior partner at law firm Jarislowsky Fraser.

Even the deadly attack at the PQ victory party, which overshadowed election night, has shaken neither exchanges nor the bond market.

Nevertheless, the financial sector will pay attention to the following things. “The Parti Québécois in 2012 is more left than 1994-1995,” says Carlos Leitao, chief strategist and chief economist at Laurentian Bank Securities. “During the campaign, [the PQ] made ​proposals for tightening the taxation of dividends and capital gains.”

But Durand says, “In a context where, even with the support of Québec solidaire, the Parti Québécois is a minority, there is much less concern among investors.”

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The main challenge of Marois and her team will be to meet the budgetary framework they set to consolidate public finances. In this regard, the PQ share concerns with the Liberals and François Legault’s CAQ.

If she doesn’t want to be defeated quickly, Marois will make compromises. Higher direct and indirect taxes announced in the PQ platform could be watered down.

“The real test will be when the Parti Quebecois presents its budget,” says Marion.

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Finally, the prospect of a referendum on sovereignty does not seem unduly irritate markets. Indeed, a minority PQ government has little leeway to initiate such a referendum.

Moreover, Marois made no mention of the word in her victory speech, cut short by the fatal shooting. At the polls, support for sovereignty was less than 30%.

This story originally appeared on our sister site, Conseiller.ca