September 6 to 10, 2021

What happened last week

Stock markets were down as investors weighed risks to recovery

Canada’s TSX and the major U.S. stock markets fell from recent record highs. Market sentiment turned cautious over the risks that COVID-19 variants pose to the pace of global economic recovery, and because of concerns over the impending withdrawal of central-bank support measures around the world.

Economic data out of China – indicating that import and export activity increased, faster than expected, in August – and strong Canadian and U.S. employment figures weren’t enough to help keep equity markets at record levels. Instead, COVID-19 infections hindered reopening plans in the U.S. and threatened to curb economic activity around the world. At the same time, reports that central banks – from the European Central Bank to the U.S. Federal Reserve and the Bank of Canada – were preparing to withdraw emergency support weighed on performance.

Oil prices remained volatile for much of the week, with U.S. production down in the aftermath of Hurricane Ida. Protests at Libyan oil fields, which impeded exports by the Organization of the Petroleum Exporting Countries and its allies, were also a factor. Oil prices increased heading into the weekend as news that China was planning to release supply reserves was greeted as a positive sign that the world’s second-largest economy was expecting demand for the commodity to rise in the fourth quarter.

Bank of Canada clarified its timeline for the withdrawal of emergency measures

In its latest policy announcement, on Wednesday, Canada’s central bank left its key interest rate at 0.25% – where it has pledged to keep it until the economy recovers from the impacts of COVID-19. The bank added that it would continue to buy $2 billion in Canadian government bonds each week, while restating that these purchases would decline as the economy recovers. It also held firm to its forecast that economic growth will accelerate in the second half of the year, despite July GDP data suggesting a slowing pace of growth.

On Thursday, in a virtual speech to the Quebec chamber of commerce, Bank of Canada Governor Tiff Macklem offered further details on the timeline and approach surrounding the withdrawal of monetary-policy support. He explained that the bank intends to bring its bond purchases down to near zero and keep it there for a “period of time” before beginning to withdraw support from the economy. At that time, its first step will be to increase its policy interest rate, rather than reducing its bond holdings. This plan aligns with economist and market expectations for a final taper of bond purchases later this year, followed by a rate hike later in 2022.

Canadian election entered final stages, following leader debates

Millions of Canadians tuned into the nationally televised leader debates on Wednesday and Thursday, where each party leader shared and defended their plans on an array of issues, including the pandemic and its impact on the economy. Polls suggest that next Monday’s (September 20) federal election will be a close, two-way race between the Liberals and Conservatives, with the NDP and Bloc Quebecois positioned to hold the balance of power in a minority parliament.

While the plans being put forward by each party are distinct from one another, all are promising billions of dollars in new spending and tax initiatives. With inflation reaching record levels, and given recent signs that the pace of economic growth is slowing, investors will be paying close attention as election day approaches. “Markets don’t like uncertainty,” notes Andrew Clee, Vice President, Product at Fidelity Canada. “Going into an election, when uncertainty is mounting, we tend to get a stagnation in terms of returns. As soon as we know the outcome and that uncertainty is gone, historically, markets tend to go up. We know the economic policies and the tax policies of the incoming government, and we can react accordingly. Removing uncertainty tends to benefit equity markets.”


The stock and bond market*
INDEX CLOSE WEEK YTD
S&P/TSX Composite 20,633.06 -0.90% 18.35%
Dow Jones Industrial Avg. 34,607.72 -2.15% 13.07%
S&P 500 Index 4,458.58 -1.69% 18.70%
NASDAQ Composite 15,115.49 -1.61% 17.28%
10-yr GoC Yield 1.23% 0.04% 0.56%
10-yr U.S. Treasury Yield 1.35% 0.02% 0.42%
WTI Crude Oil (US$/bbl) 69.72 0.62% 43.69%
Canadian Dollar US$0.7917 -0.89% 0.80%
Bank of Canada Prime Rate 2.45%

*Weekly performance ending September 10, 2021. Sources: www.bloomberg.com, www.bankofcanada.ca and www.treasury.gov.


What’s ahead

Inflation data: After higher-than-expected readings for July, investors will be looking for signs that inflation is under control and in line with central-bank expectations. Figures for August will be released on Tuesday in the U.S., and Wednesday in Canada.

Circle these dates

  • September 20: Canadian federal election
  • September 21 to 22: U.S. Federal Reserve meetings and statement
  • October 11: Canadian markets closed for Thanksgiving Day

Key take-away

Periods of uncertainty have happened before. Market fluctuations and volatility exist through every phase of the market cycle. But we notice it more when markets go down. Knowing and trusting that your investment plan is aligned with your individual goals is the best defence against market downturns. Speaking with a Co-operators financial representative can help you ensure that your plan is on track.


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