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As concerns grow over the spread of COVID-19, we keep you updated on key aspects of this challenging period with perspectives from the Global Portfolio Advisory Committee and analysis by RBC economists and strategists.


A downturn like no other

April 9, 2020

By RBC Economics

This may be the darkest quarter on record for the Canadian economy. Our consumer-driven economy could make a rebuild even tougher, as we all tend to our wounds and avoid public places for months to come. As GDP declines and unemployment reaches unprecedented levels this quarter, it may be hard to spot silver linings. But come 2021, low interest rates and pent-up demand should get growth headed back to normal. RBC’s chief economist Craig Wright joins our podcast to discuss his latest macro forecast.


RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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How Donald Trump’s fed became the world’s central bank

April 8, 2020

By RBC Economics

Global markets have rarely seen the volatility they endured in March, but in recent days a degree of calm has returned. One big reason is the Fed’s quiet role in extending liquidity lifelines to countries around the world, essentially doing for them what central banks everywhere are trying to do for their own economies. Elsa Lignos, RBC’s global head of FX Strategy, explains how the Fed restored temporary calm – and what lies ahead for markets that are still in the depths of a global pandemic.


RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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Market update: A very different kind of crisis

April 7, 2020

By Kelly Bogdanova, Patrick McAllister, CFA and Christopher Girdler, CFA

The paths of financial markets and economies almost always involve uncertainties—it’s par for the course. But the abundance of uncertainties brought about by COVID-19 is making the science (and art) of economic forecasting unusually difficult. As the rates of new infections have improved in Europe and North America, major equity markets have bounced forcefully. The S&P 500 rallied 19 percent from its March low, and is now down “only” 21.5 percent from its all-time high—all the while the economic consequences of COVID-19 have yet to come into view. Economists are still calibrating their recession estimates. RBC Global Asset Management, for example, has cut its U.S. GDP forecast again.

Following are details about the lower estimates along with thoughts from RBC’s U.S. equity strategist and the Global Portfolio Advisory Committee. We think there is more market volatility in store—both to the downside and upside.

A bigger bite

Even though the statistics surrounding the COVID-19 crisis have improved in two of the worst-hit countries—Italy and Spain—and New York is seeing light at the end of the tunnel, the impact on developed country economies is still being sorted out. RBC Global Asset Management Inc. Chief Economist Eric Lascelles now expects a deeper U.S. recession compared to his previous estimate.

  • Lascelles cut his base-case forecast for 2020 U.S. GDP growth to -7.7 percent from his recently lowered -3.2 percent estimate. This would represent the greatest annual decline since 1946, when GDP growth plunged 11.6 percent during the demobilization after World War II, as the demand for weaponry and other industrial goods declined sharply.
  • The 2020 forecast assumes that economic growth would briefly plunge 20 percent at its worst point (deeper than his previous estimate of a 15 percent decline), before stabilizing and then beginning a recovery phase. By way of comparison, the Organization for Economic Cooperation and Development, commonly known as the OECD, estimates a decline of 20 percent to 25 percent in GDP growth for developed economies.
  • Importantly, given the unique nature of this crisis, Lascelles believes it’s prudent to consider other downturn scenarios—some better, some worse—that vary by depth and duration. His scenarios evaluate a shallow, medium, and deep economic contraction, and also consider a contraction that is short, medium, and long in duration. All of the scenarios are harsher than his previous estimates in terms of the impact to GDP growth, as the depth of the downturns are deeper and the durations are somewhat longer. At this stage, Lascelles’ preferred scenario is in the middle of the matrix: A downturn that is medium in depth (down 20 percent at its nadir) and medium in duration (peak-to-trough lasting 12 weeks).
  • But it’s not just the depth and duration of the economic crisis that investors need to be paying attention to. Lascelles wrote, “It matters enormously how quickly the subsequent economic rebound occurs once quarantining is complete. We have incrementally downgraded our assumptions about this over time, recognizing that real economic damage is almost certainly occurring beneath the surface, particularly given the lateness of the business cycle before this event. As such, although the origins of this shock are entirely artificial and we have more than 60 percent of the output decline snapping back in the quarter immediately after quarantines end, we imagine the remaining 40 percent takes another year to reclaim.”

The dreaded “D” word

Such a deep downturn naturally conjures up the “D” word, as in “depression”—the Great Depression, specifically. How would an initial 20 percent plunge inside of a 7.7 percent annual decline in U.S. GDP growth compare to that dreadful period?

  • Lascelles wrote, “The medium depth scenarios leave the peak-to-trough economic decline [of 20 percent] just shy of that suffered during the Great Depression, which is nevertheless startling. But keep in mind that the biggest problem with the Great Depression was that it lasted unusually long for a recession—four years of declining GDP, not to mention multiple years of recovery—whereas the defining feature of this event is how short and artificial it should be.”
  • Manic markets

    Financial markets tend to look forward, not backward. We believe forthcoming poor economic data is largely reflected in the rapid and steep equity selloff of the past month. It’s reasonable to assume that equity markets are already pricing in deep (and brief) contractions for the global and developed economies, including the U.S. However, it’s not yet clear if markets are underestimating (or overestimating) the magnitude and duration of the economic and corporate earnings retrenchments, and whether they have pegged the recovery trajectories properly.

    • RBC Capital Markets, LLC Head of U.S. Equity Strategy Lori Calvasina wrote, “We are keeping an open mind about whether the S&P 500 saw its coronavirus low on Mar. 23, but we remain skeptical and would not be surprised to see the index retest its 2020 low and make a new one.”
    • She points out that sentiment among individual investors has not reached extremely bearish levels, according to the American Association of Individual Investors weekly survey, like it often does near a market bottom. When very bearish readings occur, it can be a good contrary indicator for the market. Put another way, the more bearish investors become, the higher the fear, which is an indication that many investors have thrown in the towel—which is then often accompanied by a bottoming process.
    • This COVID-19 crisis has sparked multiday selloffs and big rallies in the S&P 500 and indexes in other major markets. We are reminded that such moves were a hallmark of the 2008–2009 financial crisis, and this process could be playing out again during this bear market.
    • Calvasina added, “While we remain constructive on the S&P 500 between now and year-end, we also think it is likely that the S&P 500 will retest its Mar. 23 low. We also wouldn’t be surprised to see it hit a new low as equity investors come to grips with the full extent of the damage that the coronavirus poses to the U.S. economy and earnings.”

    Canada hit by a dual shock

    • The S&P/TSX Composite plunged 37 percent from its February high to its March trough. It has rallied 21 percent since, but has nevertheless trailed U.S. benchmarks through this period of upheaval. The Canadian equity benchmark is now trading at a forward price-to-earnings multiple of roughly 13.9x compared to a long-term average of 15.5x. Despite a seemingly discounted valuation, we expect earnings estimates will be subject to downside risk as companies provide updated guidance alongside Q1 results.
    • We believe that the dual shocks of depressed oil prices and virus-related disruption have increased the downside risk for the Canadian equity market. RBC Economics forecasts that the Canadian economy is in recession, and we believe there is considerable uncertainty as to its depth and duration. The S&P/TSX Composite has historically underperformed the S&P 500 during recessions due in large part to its pro-cyclical bias with Financials, Energy, and Materials accounting for nearly 60 percent of the domestic benchmark. Amid the current contraction, we fear that Canadian households are ill equipped to weather a prolonged downturn given elevated household debt levels and a meagre savings rate.
    • Canada’s largest lenders are well capitalized and should be able to navigate broad-based credit weakness with dividends intact, in our view, but we expect earnings to contract meaningfully. Dividend yields may look attractive, but we caution that bank investors must be willing and able to stomach the volatility that we expect through this period of uncertainty.
    • Amid depressed commodity prices, balance sheet preservation is the top priority for oil producers with capital spending plans cut by roughly 30 percent and a number of dividend cuts announced. In the event that oil prices remain depressed for a protracted period of time, even the largest and best-capitalized companies could be forced to reevaluate their dividend policies.
    • The trajectory of oil prices is difficult to chart amid an unprecedented combination of supply and demand shocks. Press reports indicating a renewed willingness among producing nations to coordinate supply cuts have breathed some life into oil prices, but the contours of any potential agreement are hard to assess given the geopolitical considerations at play.
    • The Bank of Canada has done its part by cutting its benchmark interest rate to near zero; however, we believe fiscal stimulus is critical to any attempt to offset the economy’s rapid and severe contraction. The Canadian government has caught up with other developed nations with direct support estimated at CA$105 billion, according to RBC Economics. Of this total, CA$71 billion comes in the form of wage subsidies designed to keep workers connected to employers, which will be key to a post-virus recovery.

    Sourcing value through credit markets

    Equities aren’t the only market moving quickly. Within fixed income, the credit market also deserves attention.

    • The yields on the main U.S. investment-grade and high-yield bond indexes have fallen roughly one percent and two percent, respectively, since peaking on Mar. 23. A confluence of factors, including commitments from global central banks and governments to fully fight the loss of economic output, has helped settle nerves within credit markets. The yield on the high-yield index remains historically high at approximately 10 percent, but the yield on the investment-grade index has fallen back towards its five-year average.
    • A number of companies have taken advantage of this window of opportunity to issue debt. There has been more than $100 billion of investment-grade supply in the U.S. over the past week, with year-to-date issuance more than 50 percent higher than last year. Even the high-yield and leveraged-loan markets have seen a couple of issuers test the water after two and four weeks’ hiatus, respectively. With coupons in the high single-digit to double-digit range, the water appears lukewarm for lower-quality issuers.
    • A rapid repricing of credit compensation—the quickest jump in corporate bond yields in history—is one reason investors (ourselves included) have started to look more favourably on corporate bonds. Looking at bond yields with the level of corporate leverage in mind, i.e., how much compensation investors receive for the amount of debt that corporations have on their balance sheets, investment-grade and high-yield bonds show a much improved risk-return profile, in our view.
    • A number of recent announcements by global central banks targeted at providing relief to financial markets have contributed to the improving credit outlook. The European Central Bank expanded the size and scope of its bond purchase programs, a notable shift away from the complex and restrictive rules previously in place, while the Federal Reserve will start purchasing corporate bonds and bond-based exchange-traded funds (ETFs), a first for the U.S. central bank. So far, these measures appear to be having the desired effect; a number of bond ETFs that had been trading at sizeable discounts to their net asset values are now trading at modest premiums.
    • We believe the repricing of risk in the corporate bond market has tilted the medium-to-long-term risk-reward profile back in favour of investors, making it an attractive place to put cash to work. From current valuations, corporate credit has historically outperformed government bonds and often managed to keep pace with equities in the initial leg of a recovery.
    • We continue to view the Canadian preferred share market as down, but not for the count. Yields in excess of six percent are available on a diverse mix of structures, and companies must continue to serve this dividend stream unless common equity dividends are reduced to zero dollars.

    Step by step exit strategy

    We continue to view the COVID-19 crisis as transitory, believing it will pass, and that major economies will eventually heal. The exit strategy from mass quarantines represents one of the key sources of uncertainty for the economic healing process, including in North America. We think there are a number of steps for economies to get back to “normal.”

    • Step one: Social distancing on a mass scale. This is well underway and seems to be reaping positive results, which is one reason equity markets have bounced lately.
    • Step two: Partially reopening major economies while maintaining some level of social distancing. This is more complex.
      This could require much more COVID-19 testing and contact tracing, strengthened medical capabilities, and more reliable therapeutic treatments. Lascelles said, “Progress is being made on all fronts, but none of these have been fully achieved. In turn, it is pure speculation how long economies must remain shuttered.”
      Lascelles added, “One can imagine developed-world economies implementing a tiered return to work along a combination of four lines: (a) by region, based on local conditions; (b) by age and health status; (c) by whether people have already been infected and subsequently recovered; and (d) by incrementally expanding what constitutes an ‘essential’ function.”
    • Step three: The full re-opening of economies without physical distancing. Lascelles believes this requires strong COVID-19 therapeutics or an outright vaccine, alongside continued aggressive infection testing and contact tracing.
    • Step four: Be prepared for the next pandemic. In Lascelles’ view, this would require putting in place systems and safeguards that will “prevent daily life from skidding to a halt during the next pandemic.”

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    MacroMemo: What’s new with coronavirus

    April 6, 2020

    By Eric Lascelles

    It is a reflection of the uniqueness of the present situation that this publication no longer introduces a variety of new themes and topics every week. Instead, we are stuck on the COVID-19 channel for the foreseeable future. However, that doesn’t mean the same information is being regurgitated week after week. The virus statistics change and our understanding of the disease evolves. New real-time economic signals arrive, our economic forecasts adjust and we are able to muse more thoughtfully about the long-run implications.

    Read the full MacroMemo here .

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    A coronavirus cure? Listen for wishful thinking

    April 6, 2020

    By RBC Economics

    The race is on for vaccines and treatments for COVID-19. Brian Abrahams, RBC’s Co-head of Biotechnology Research, has some hope based on what he’s seeing but cautions we’re “in the early innings.” A vaccine is probably not realistic before 2021, he warns. And treatments – antivirals and anti-inflammatories, especially – could be months away. The efficacy of treatments could also vary widely across populations, just as we’re seeing with the virus. A magic bullet for curing coronavirus “is probably wishful thinking.” Even so, the availability of treatments, along with other measures, may slow infections, reduce their severity and enable some return to normalcy.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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    Audio commentary: The path to recovery remains uncertain

    April 6, 2020

    By Jim Allworth and Mark Bayko, CFA

    Mark Bayko and Jim Allworth, both members of the firm’s Global Portfolio Advisory Committee, provide an update on the outlook. Despite the view that significant uncertainty remains near-term with respect to the path towards economic recovery, they continue to believe the longer-term drivers of earnings and cash flows for successful businesses remain intact.

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    New coronavirus hit to housing market is just the beginning of a tough period

    April 3, 2020

    By Robert Hogue, RBC Economics

    Early results from local real estate boards show a sharp drop-off in home resales in the second half of the month after what was a strong first half. We expect activity to slow to a crawl in most markets across the country in April and for as long as social distancing and lock-down measures are in place. Home prices held up well overall in March—strengthening further in both Toronto and Vancouver—though it’s unclear how long this can continue. We expect property values to come under increasing downward pressure the longer restrictions persist and the deeper the recession gets. Super thin activity also makes the market prone to erratic price moves.

    The Toronto Region Real Estate Board indicated Toronto-area home resales were up 49 percent y/y in the first 14 days of March and then plummeted -16 percent in the remainder of the month. On the whole, March resales were 12 percent above the level a year ago. This marked a significant slowing from the 44 percent y/y increase recorded in Feb. By our own rough calculation, March activity shrunk about 23 percent from Feb. on a seasonally-adjusted basis. We also estimate new listings fell nine percent. Demand-supply conditions loosened somewhat as a result though remained in balanced territory —at least, overall in the month—maintaining support for prices. The rate of increase in the MLS Home Price Index accelerated to 11.1 percent y/y. We expect price support to wear down in the weeks ahead. Still we see a low risk of a collapse at this point. We believe the extraordinary policy response from all levels of government and the Bank of Canada, as well as accommodating measures offered by financial institutions will soften the blow.

    A similar story emerged in the Vancouver area in March where the heat in the market evaporated over the latter half of the month. The overall sales figure looked impressive at first glance—up 46 percent y/y—but it was mostly because of an extremely weak comparison point a year ago. We estimate home resales fell seven percent from Feb. on a seasonally-adjusted basis. The MLS HPI climbed above the year-ago level for the first time in 17 months (up 2.1 percent). This could well be as high as the index will get. We expect pricing dynamics to weaken in the period ahead.

    The outlook is even bleaker in Calgary where the local real estate board reported an 11 percent y/y sales drop in March sales and 0.8 percent decline in the MLS HPI. Given the severity of the economic shock—double whammy delivered by COVID-19 and oil price plunge—and soft demand-supply conditions ahead into the crisis, we believe property values are at risk of a more sizable decline.

    Robert Hogue is a member of the Macroeconomic and Regional Analysis Group, with RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and for the provincial economies. His publications include Housing Trends and Affordability, Provincial Outlook and provincial budget commentaries.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics.

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    Health crisis, yes; debt crisis, no

    April 3, 2020

    By RBC Economics

    The explosion of fiscal spending plans in recent weeks will lead to more public debt than many thought imaginable just a few weeks ago. The U.S. government will need to borrow $2 to $4 trillion just to get through the crisis. Western Europe perhaps the same. Canada could add another third to public debt level. But there’s no reason we can’t slowly grow our way out of the debt hole, especially if interest rates remain low. Eric Lascelles, Chief Economist for RBC Global Asset Management, explains how the debt burden of COVID-19 can be managed.


    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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    Global equities: Uncertainty everywhere

    April 1, 2020

    By Jim Allworth and Kelly Bogdanova

    Growing uncertainty about the future course of the pandemic and economy has persuaded us to move our recommended equity positioning to Underweight.

    Read the full article.

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    Breaking down the Fed’s response to the new coronavirus

    April 1, 2020

    By Thomas Garretson, CFA

    The Fed is adding a new twist to its asset purchase program by buying corporate and municipal bonds. The question is, should investors do the same?

    Read the full article.

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    The eurozone’s next crisis

    April 1, 2020

    By RBC Economics

    Good news, the rate of growth of new COVID-19 cases in Europe appears to be slowing. Bad news, the economic cost is just beginning to hit home. With a deep and broad recession underway, the eurozone is again divided over how to stabilize the economy and pay for its recovery. Ideas for joint action, from procurement of protective equipment to unemployment benefits, are coming by the day. But there’s no agreement on how to backstop the enormous debts member countries will incur. RBC’s London-based macro strategist Peter Schaffrik explains how the continent will bridge its newest divide.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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    Canadian manufacturing activity contracting sharply

    April 1, 2020

    By Nathan Janzen, RBC Economics

    • The Canada Markit manufacturing PMI index fell to at least a nine in a half year low in March
    • U.S. manufacturing also contracted slightly, with worse yet to come
    • Service-sector downturn likely significantly larger in March
    • Glimmers of light at the end of the tunnel from China data

    The Canada Markit manufacturing PMI fell to at least a nine in a half year low in March, and although arguably better than feared at 46.1, it still tipped firmly below the break-even 50 level indicating a decline in activity. The reality is that will get worse in the near-term. Unlike most economic downturns, the pullback this time around is being led by service-sector disruptions resulting from social/physical distancing. Those shutdowns already impacted manufacturing output in March via both demand reductions, including from Canada’s hard-hit energy sector, and disruptions to global supply chains but the impact will be larger in April. The U.S. ISM manufacturing index also out this morning was better than feared, but will certainly deteriorate further. And that has obvious implications for Canada given tight cross-border industrial integration.

    The service-sector pullback has almost certainly been far more pronounced than for manufacturing – in line with the earlier experience in China where service-sector weakness significantly outstripped the pullback in the normally more volatile manufacturing sector. But China’s March reports also provide a glimmer of light at the end of the tunnel. China’s experience with the COVID-19 outbreak has been running ahead of the rest of the world. Dramatic measures there to curb the spread of the virus in January and February weighed heavily on output, but the virus was ultimately brought under control and activity has started to resume. China’s Markit PMI manufacturing measure actually bounced back to just slightly above 50 in March – and earlier indicators suggest service-sector activity also started to recover. That will not necessarily last given the dramatic pullback in global demand over just the last several weeks. And a level of 50 really just means that activity is no longer contracting. But the bounce-back does serve as a reminder that there is a path out of this downturn as the virus is brought under control, even if it will take time to get there.

    Nathan Janzen is a member of the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics.

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    COVID-19 update: A conference call with Eric Lascelles

    March 30, 2020

    By Eric Lascelles

    How are leading nations faring in their battle against the coronavirus outbreak? And how should investors picture the shutdown’s impact to economic activity? RBC Global Asset Management Chief Economist Eric Lascelles points out that, unlike in some prior crises, this time we weren’t coming out of a bubble. Therefore, however deep the contraction may be, it may not be particularly long-lasting.

    For more from RBC Global Asset Management, read their insights .

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    MacroMemo: New coronavirus remains the focus

    March 30, 2020

    By Eric Lascelles

    The new coronavirus continues its global spread, though the outbreak in Europe may be starting to stabilize. Financial markets have become slightly less volatile and less uniformly sour, though risk assets remain sharply lower than pre-coronavirus. For the first time in several weeks, we have not been compelled to take a knife to our GDP forecasts – surely a small victory. We took advantage of the reprieve by enhancing our thinking on a range of related macro subjects. A deep, though hopefully brief, recession is now very much underway.

    Read the full MacroMemo here .

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    A tough but temporary blow to Canada’s housing market

    March 30, 2020

    By Robert Hogue, RBC Economics

    Social distancing to severely disrupt spring house hunting season

    Canada’s housing market will slow to a crawl this spring as Canadians follow social distancing orders in order to combat the spread of COVID-19. We expect realtors to suspend open houses and cut any private showings to a bare minimum. Signs were starting to point toward a significant pullback even before governments stepped up restrictions on social gatherings and despite the adrenaline shot from the Bank of Canada’s back-to-back interest rate cuts this month. Equity markets’ freefall, mounting job losses, reduced work hours, the shutdown of Canada’s borders (stemming the flow of in-migrants) will hammer confidence and cool demand. Investors and speculators also are likely to sit things out for a while. There will be plenty of reasons for sellers to wait and see as well. A shock like this one is an inauspicious time to get full value for a property. We expect for-sale inventories to shrink, which will further contribute to stall activity.

    The pandemic will be a temporary shock

    Housing activity will resume once the health crisis comes under control and authorities lift containment measures. The timing and speed of the recovery is uncertain at this point. We’re currently penciling in early-summer as the restart date. We think the recovery will come in stages—taking buyers up to a year to regroup and rebuild confidence amid high unemployment. Based on these assumptions, we project home resales to dive by nearly 30 percent this year in Canada to a 20-year low of 350,000 units. We see the outlook improving markedly next year in most markets. Exceptionally low interest rates, strengthening job markets and bounce-back in in-migration will generate substantial tailwind. We project home resales to surge more than 40 percent to 491,000 units in 2021.

    Property values will fall briefly

    Property values have received strong support from tight demand-supply conditions in the majority of markets since mid-2019. We expect some degree of support to hold initially as both buyers and sellers go into hiatus. Lower interest rates, governments’ financial help to vulnerable Canadians and banks offer to defer mortgage payments will provide some downside protection. This won’t last. In a matter of weeks or months, surging unemployment and the market’s illiquidity will compel a growing number of tight-squeezed sellers to make price concessions. We project Canada’s composite benchmark prices to fall briefly over the second half of 2020 by an average of 2.9 percent year over year. The surge in activity we expect in 2021 will tilt the scale back in favour of sellers and swing the price dynamics around.

    Oil price plunge puts Prairie markets at greater risk

    The outlook is bleaker for markets in oil-producing regions where the plunge in oil prices will deepen and prolong economic hardship. Price declines are bound to re-accelerate significantly in Prairie markets. High inventories have been an issue for some time and the situation is likely to get worse. We see little prospects for prices to rebound anytime soon.

    Housing affordability picture was stable overall in the fourth quarter of 2019

    The string of quarterly affordability improvement in Canada ended at three. RBC’s national aggregate affordability measure stalled in the final quarter of 2019 at 50. percent. This was down slightly from 50.8 percent a year earlier. More significant improvements were recorded in Vancouver, Victoria, Calgary and Saint John over that period—though the changes in Vancouver and Victoria didn’t alter their status as Canada’s least and third-least affordable markets. RBC’s measure rose the most in Toronto and Ottawa relative to the third quarter, reflecting accelerating prices. In Montreal, buyers benefit from a strong income gain which more than offset a solid price advance.

    Robert Hogue is a member of the Macroeconomic and Regional Analysis Group, with RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and for the provincial economies. His publications include Housing Trends and Affordability, Provincial Outlook and provincial budget commentaries.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics.

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    “Market bottoms take time to form”

    March 30, 2020

    By RBC Economics

    The past week saw four big up days for equities, and that tells Lori Calvasina that we haven’t seen enough capitulation to signal a new bull run. She believes more lows may lie ahead. As head of U.S. equity strategy at RBC Capital Markets, Calvasina has been listening to big investors and studying market sentiment – and she’s detecting too much calm given the economic storm. On this podcast, she explains how investors should approach the current market and prepare for a stronger 2021.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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    Canada’s two-fisted punch

    March 27, 2020

    By RBC Economics

    Canada struck back with a two-fisted punch to send monetary and fiscal confidence to the economy. The Bank of Canada not only cut rates; it embraced quantitative easing, to buy bonds and other financial assets from governments that will be borrowing a lot more money. For its part, the federal government came out with Phase 2 of its stimulus package, to help small- and medium-sized businesses stay open and keep their workers on payroll. Will it be enough to prevent a major recession? RBC’s Chief Economist Craig Wright explains.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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    BoC cuts rates and joins the QE club

    March 27, 2020

    By Josh Nye, RBC Economics

    The Bank of Canada lowered its overnight rate to 0.25 percent on Friday and launched a new program of weekly government bond purchases that represents the bank’s first foray into quantitative easing. QE is hardly a new tool for central banks—it was used extensively by the Fed, ECB, BoJ and BoE following the global financial crisis. Canada was able to get by without such extraordinary policy measures, but unfortunately the scale of the coronavirus crisis has now forced the BoC to join the QE club, as the RBA and RBNZ did in recent weeks.

    The BoC will purchase a minimum of C$5 billion of Government of Canada (GoC) securities every week. Purchases will be adjusted as needed and the bank will continue the program “until the economic recovery is well underway.” The purchases will expand the bank’s balance sheet, a hallmark of QE (if purchases continue at the minimum rate for half a year the size of the bank’s balance sheet would more than double). Governor Poloz didn’t argue against calling the program QE, though he made a distinction between the bank’s current goal of ensuring smooth functioning in financial markets and the more traditional monetary policy objectives of QE like lowering longer-term interest rates.

    In fact, Governor Poloz noted several times that the BoC is focused more on restoring financial market functionality rather than traditional monetary policy stimulus, and that fiscal policies are better able to support the economy at this stage. Toward that market functioning goal, the second program announced today (commercial paper purchases) adds to others put in place in recent weeks (purchases of Canada mortgage bonds, banker’s acceptances, and provincial money market securities; and other liquidity providing measures) to ease stress across key funding markets and ensure lower risk free rates are effectively transmitted to a range of borrowers. As the GoC market is “foundational” to those other markets, QE will also help in that regard.

    Today’s 50 basis point rate cut returns the overnight rate to its financial crisis low of 0.25 percent, which Governor Poloz referred to as the “effective lower bound.” When asked about the potential for a negative policy rate, Poloz argued against taking this step. While he noted that theoretically the overnight rate could be lowered to -0.50 percent, other central banks’ experiences with negative policy rates suggest negative effects on the financial system “are significant.” Adding stress to the financial system would go against the bank’s current goal of ensuring its smooth functioning, and in any case lower rates will have little impact on the economy amid current shutdowns. Summing up, Poloz said the bank is “not contemplating” negative rates and the financial system “will work better at this level.”

    That begs the question—what will be the BoC’s next move if more stimulus is needed? Given the scalability of the programs announced thus far, we think the next step would be to increase the pace of asset purchases, and potentially broaden their scope. That could mean buying more GoC securities or ramping up CMB purchases to more QE-like levels. We also wouldn’t rule out more substantial purchases of provincial and corporate securities to address wider spreads in those markets, if needed. The policies announced today look like an appropriate response at this stage, but in this fast-changing crisis it’s impossible to rule out the need to do more.

    Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics.

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    Canadian dollar weakened but not headed for historical lows

    March 27, 2020

    By Josh Nye, RBC Economics

    2019 was an unusually quiet and stable year for the Canadian dollar. 2020 has been anything but. Canada’s currency was worth 77 U.S. cents at the start of the year but lost 10 percent of its value in recent weeks, dropping to a four year low of just 69 cents before recovering slightly in the past few days. Broad strengthening in the U.S. dollar has been a factor—the greenback was at times up more than nine percent against all currencies (on a trade-weighted basis) and about 7.5 percent higher compared with advanced economies. Among the latter, Canada is joined by other commodity producers (Australia, Norway) and countries launching new quantitative easing programs (New Zealand, Australia again) in seeing double-digit declines in their currencies.

    That the Canadian dollar has weakened in an environment of significant risk aversion, collapsing energy prices, and general demand for U.S. dollars is unsurprising. Given continued uncertainty over the depth and duration of coronavirus containment measures, it’s too early to say whether risk appetite or oil prices have hit bottom. New easing announced by the Bank of Canada—it cut the overnight rate to its effective lower bound and launched its first QE program on March 27—could also send the currency lower as markets continue to digest those moves. But we don’t think the Canadian dollar is headed for its all-time low of 62 US cents seen in the early-2000s.

    We’ve come a long way from the “Northern Peso” days of the mid-1990s when Canada lost its AAA credit rating and federal government debt was more than 60 percent of GDP. Having run surpluses for a decade prior to the financial crisis, Canada’s federal debt-to-GDP ratio now stands at a G7-low 31 percent. A significant increase in government spending to deal with the current crisis (along with a sharp drop in revenues amid slower economic activity) could push that ratio 10 percentage points higher, but would still leave Canada the envy of other countries that are launching deficit-financed stimulus of their own. An improved fiscal position has helped Canada rein in its net international borrowing (the country is even in a net asset position on a market value basis). With lower oil prices cutting into Canada’s $90 billion oil exports, a larger current account deficit will hurt that net asset position. But the country is still a long way from the international debt levels seen in the 1990s.

    The Canadian dollar’s darkest days have come amid periods of financial market volatility, from the 1998 Russian financial crisis and LTCM collapse to the dot-com bust in the early-2000s. The same dynamic is at play now as investors grapple with an unprecedented, sharp downturn in global economic activity. The Canadian dollar’s stronger relationship with oil prices (compared with decades ago) isn’t helping. But a healthier fiscal position and less reliance on external borrowing should provide a backstop. 69 cents might not be as bad as it gets, but we doubt 62 cents will come into view.

    Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics.

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    King dollar steps back

    March 26, 2020

    By RBC Economics

    While stocks have been surging, the US dollar has been on a week-long slide. The correction comes after an extraordinary run-up in the dollar in early March, when investors fled to the greenback’s higher ground and corporates followed, to ensure they were dollar-funded heading into an economic crisis. The prospects now of massive fiscal stimulus and concerted central bank intervention have investors looking anew to the euro, pound and even the Canadian dollar. George Davis, RBC Capital Markets’ currency strategist, explains what lies ahead.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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    How the U.S. stimulus package blunts the coronavirus shock

    March 26, 2020

    By Kelly Bogdanova

    Washington is doing whatever it takes and then some. We look at who gets what from the massive relief, and consider the impact for the economy.

    Read the full article.

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    Can Trump bring peace to the oil war?

    March 25, 2020

    By RBC Economics

    Donald Trump is using every diplomatic tool to stop the oil war unleashed by Russia and Saudi Arabia, betting that neither can sustain themselves for long at $25 a barrel. But the Russians may be betting that Trump – or at least U.S. oil producers – will blink first, by scaling back American production and allowing OPEC+ to again drive global markets. Even if the oil powers agree to stabilize markets at a higher price, it may take longer than many are expecting, as the COVID-19 pandemic decimates global growth. Helima Croft, RBC Capital Markets Global Head of Commodities Strategy, joins us to explain.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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    Audio commentary: Coronavirus, the oil shock, and market impact

    March 25, 2020

    By Mark Bayko, CFA and Patrick McAllister, CFA

    To help make sense of the challenging environment, Mark Bayko, head of the Portfolio Advisory Group, and Patrick McAllister, Canadian portfolio advisor, discussed how the coronavirus outbreak and oil price shock are impacting the Canadian economy and stock market, what they’re observing from the fast-moving developments, and what to expect from here.

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    Federal stimulus grows to $52 billion

    March 25, 2020

    By Colin Guldimann RBC Economics

    Just one week ago the Government proposed a $27 billion stimulus package including two income support benefits, as well as $55 billion in tax deferral for individuals and businesses. Today, Finance Minister Morneau outlined a new merged benefit for workers who lose their incomes due to the health and economic effects of the virus.

    With new spending of $25 billion, the total deficit this year will likely be close to $110 billion, rather than the $28 billion the Government projected in the fall. The new Canada Emergency Response Benefit, merges the previously announced emergency benefits and expands eligibility to furloughed workers who remain employed but are unable to work, in addition to those who lose their jobs altogether and the previously announced ten percent wage subsidy for those who keep going to work at small businesses. Together, the measures approved by Parliament this morning total 2.3 percent of GDP, up from 1.2 percent earlier.

    These changes are positive, though in our view leave room for more to be done. As we noted on Monday, the stage one fiscal support by the Federal government is small in comparison to international peers, and lacks sufficient support for businesses. With nearly 1 million EI claims last week alone, according to some reports, layoffs by businesses seeking to stem losses are already occurring. By keeping strong links between employers and employees, income support for furloughed workers (as opposed to the ten percent wage subsidy for those who keep working) will help reduce search and training costs when physical distancing is no longer needed, quickening the recovery from the crisis. It also brings Canadian fiscal support closer to those announced by other governments worldwide, who continue to announce new measures as well.

    Still, support for workers does little to help businesses pay non-labour expenses. Short-term tax deferrals will help smooth out near-term cash flow issues, but will not keep rent, leases, and interest on existing debt from sinking businesses without any income. If physical distancing measures drag on, cash flow problems may quickly become solvency problems and layoffs could go from temporary to permanent. If their employer has failed when they’re ready to go back to work, temporary income support from the Government will be little comfort to unemployed workers.

    The Government should continue to look at credit support for medium and large firms, and consider lending with loan forgiveness for smaller firms that meet certain conditions (e.g., those that continue employing or paying employees through the disruption). The Prime Minister suggested more help for businesses was on the way, and we hope it comes soon.

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics..

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    Market update: Reflection of reality

    March 24, 2020

    By Kelly Bogdanova, Patrick McAllister, CFA and Mikhial Pasic, CFA

    The serious human toll and adverse economic and financial market consequences of COVID-19 continue to mount as the virus spreads further throughout North America and penetrates deeper in Europe. As a result, the global equity selloff has persisted with the S&P 500, at its worst point, plunging 34 percent from it's all-time high reached a little more than a month ago. Stress in the fixed income market has also continued even though major central banks have acted swiftly and resolutely. We think financial market volatility is likely to remain over the near term—both to the downside and upside.

    Due to the worsening economic conditions and the related adverse impact on corporate profits, RBC’s economist and U.S. equity strategist have further downgraded their outlooks. Following are their latest thoughts about the crisis and also the potential path toward recovery, along with views of the Global Portfolio Advisory Committee.

    A deeper recession but …

    RBC Global Asset Management Inc. Chief Economist Eric Lascelles now believes a deep (yet potentially brief) recession will occur in the U.S., Canada, and Europe as day-to-day life has nearly come to a standstill.

    The nine coronavirus downturn scenarios that Lascelles is evaluating for the U.S. economy—ranging from those that would have a shallow impact on growth, to a medium impact, and to a deep impact—have all deteriorated recently as authorities have implemented stringent preventative measures to halt the spread of the virus and protect the population.

    • If the U.S. economic retrenchment is medium in depth and duration—the scenario Lascelles views as most likely at this stage—he anticipates it could result in U.S. GDP declining by 15 percent for a brief period, at its worst point. Because of the rapid, compressed nature of the health crisis thus far, he expects this blow to take place in Q2—potentially resulting in the largest quarterly decline in U.S. history. Lascelles wrote, “The employment bad news is already starting to roll in. U.S. regional jobless claims are already running around ten times higher than normal. The Canadian numbers are also surging.”
    • As economic data is released in April and May, and as corporations report Q1 earnings during the same period, the full impact of the virus will likely become more apparent in the U.S. and other major economies. The good news is that financial markets have already begun to factor this into price levels. In our view, this is a key reason major equity markets have fallen by more than 30 percent so quickly—markets are anticipating a big hit to GDP. But it is unclear at this stage if the coming economic and profits deterioration is fully factored into equity markets given the numerous uncertainties that linger and the difficult nature of modeling this exogenous health shock. We don’t doubt there will be some surprises in the April and May data.
    • If the spread of the virus wanes in the summer and the U.S. economy begins to stabilize and then recover toward year end—the most likely scenario in Lascelles’ view—the full-year GDP hit would be nowhere near the severe retrenchment in Q2, but still sizeable. Lascelles forecasts a 2.8 percent decline in U.S. GDP in 2020, below his previous estimate of a shallow downturn when the spread of the virus had not been as severe in North America and Europe. To put this in context, a full-year decline of 2.8 percent—which includes a severe drop in Q2—would be slightly deeper than in 2009 during the global financial crisis, and it would be the largest annual U.S. retrenchment since 1946. Read more in the latest MacroMemo from Lascelles.
    • Lascelles added, “Europe and Canada may suffer modestly more than the U.S., because of the severity of the disease in Europe and the additional blow of low oil prices in Canada.”

    … the recovery could be quicker and stronger

    Because the coronavirus shock is such a unique event, we believe the contours of the recession and recovery could be unique as well.

    • Lascelles wrote, “Fortunately, the trough [of the recession] is not likely to last for especially long. A further silver lining is that policymakers have now introduced truly extraordinary amounts of monetary and fiscal stimulus. This is key for preventing a temporary and artificial supply-led shock from turning into an enduring demand-side one.”
    • The Federal Reserve has thrown more than the kitchen sink at this crisis, including a liquidity backstop for credit markets. Importantly, its support has come much more quickly than during the global financial crisis—so quickly that the Fed’s biggest detractor-in-chief, President Donald Trump, praised its actions. Other major central banks have stepped up forcefully as well.
    • Fiscal support from governments is coming almost just as fast from the UK and Canada, and is in the works in Continental Europe. While there has been criticism that some in Washington are dragging their feet to pass a $2 trillion stimulus package, in reality, they are also responding much more quickly than during the financial crisis. We believe the fiscal and monetary actions will blunt the global downturn and boost the recovery.
    • Lascelles also points out that economies have the potential to recover more quickly because the hit to labor supply and product demand are largely due to “stay at home” and “work from home” government edicts being implemented for public health purposes, and can be rapidly reversed when the virus wanes. He said, “Reflecting all of this, our tentative 2021 GDP forecast assumes quite an impressive rebound.” Lascelles added, “We are working with the assumption that any rebound should be faster than usual … China has already demonstrated that it is perhaps 80 percent of the way back to normal a mere month after restarting its economy.”

    Shadow cast over profits

    The much higher likelihood that a recession will unfold in 2020 is the main reason Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, LLC, has further cut her U.S. profits outlook.

    • Calvasina now estimates S&P 500 earnings will retreat to $139 per share, much lower than her previous forecast of $165. The new estimate equates to a 15 percent year-over-year decline versus the $163 level achieved in 2019, as measured by FactSet. This estimate takes into consideration the earnings declines experienced during the previous three recessions since 1991—all of which transpired due to very different circumstances, but nonetheless can be a useful guide in aggregate, she believes.
    • As the middle of this year approaches, more institutional investors will start to look past the valley of 2020 earnings, with an eye toward a potential bounce in profits in 2021. For now, Calvasina is “penciling in” an earnings forecast of $158 per share for 2021, which would represent almost 14 percent growth over her 2020 estimate. This assumes that the economic recovery would begin in Q4 of 2020, and persist in 2021. It also incorporates a moderate increase in operating margins.
    • In the near term, however, the market still has to contend with the coronavirus and what is likely to be a difficult Q1 earnings reporting season. Calvasina wrote, “Equity investors need to get a better handle on the path of the coronavirus and the government’s plan of attack for the virus and fiscal response in order to gain more visibility into and confidence about the path of the economy.” Furthermore, the equity market typically needs at least some visibility into the earnings outlook before it can stabilize.

    Canadian equities: Virus and oil markets form a one-two punch

    • The Canadian equity market has underperformed relative to U.S. benchmarks as the dramatic decline in crude oil prices has compounded virus-related uncertainty. The S&P/TSX Composite Index is now trading at a forward price-to-earnings multiple of roughly 11.5x compared to 15.1x at the start of the year and a long-term average of 15.5x. Despite the market’s seemingly compelling valuation, we expect earnings estimates to remain in flux with considerable downside risk. Accordingly, investors should continue to emphasize quality in their Canadian equity portfolios and resist the temptation presented by companies with severely discounted valuations but similarly challenged outlooks.
    • The uneven representation of sectors in the Canadian market (i.e., Financials and Energy account for over 40 percent of the benchmark) brings particular challenges. With limited visibility on how the COVID-19 outbreak and the global oil price war might play out, we are mindful of the risk that business activity disruptions could last longer and inflict more durable damage to the Canadian economy than what markets currently anticipate. We suggest investors consider markets outside of Canada for exposure to sectors that are under-represented in Canada.
    • Balance sheet preservation is now the top priority among companies in the Energy sector. We have already seen capital spending plans across the sector cut by roughly 30 percent and a number of companies reduce their dividends. In the event that energy prices remain depressed for a protracted period of time, even the largest and best-capitalized companies could be forced to reevaluate their dividend policies.
    • Not unlike the overall Canadian economy, the banks are confronting the dual shocks of COVID-19 and depressed energy prices. While direct lending exposure to the oil & gas industry is manageable, in our view, the greater concern for the banks is the potential for broad-based credit weakness that could accompany a longer and deeper pullback in the economy. The banks are well-capitalized and, as a result, dividends should be sustainable under a range of economic scenarios. As such, dividend yields may look attractive but bank investors must be willing and able to stomach the volatility that we expect through this period of uncertainty.
    • The Canadian federal government announced an CA$82 billion aid package to complement the monetary easing enacted by the Bank of Canada. The package consists of CA$27 billion in direct support and a further CA$55 billion in tax deferrals. RBC Economics notes that the direct initiatives amount to 1.2 percent of GDP, which pales relative to more ambitious spending plans unveiled by other developed nation governments. As such, RBC Economics expects more aggressive announcements in the weeks to come.

    Finding value in credit markets

    Rumblings in the credit market have been just as important—if not more so—than the developments in equity markets.

    • The yields on the main U.S. high-yield and investment-grade bond indexes have both roughly doubled over the past few weeks and now sit around 11 percent and five percent, respectively, as a confluence of fundamental and technical factors has placed upward pressure on corporate bond yields.
    • A number of corporations have been in search of capital in anticipation of a dip in cash flow, but potential buyers have also seen their capital base depleted as investors pulled roughly $36 billion from investment-grade corporate bond funds last week. This represents the biggest weekly withdrawal ever, nearly four times the size of the previous largest withdrawal.
    • Despite these outflows, nearly $75 billion in corporate bonds have been issued since Mar. 17. Issuance has mostly come from the most creditworthy borrowers, but issuing corporations have had to offer generous pricing terms thanks to the aforementioned supply/demand imbalance.
    • The Federal Reserve’s announcement on Mar. 23 of a slew of new and unlimited bond purchase programs helped stabilize funding costs. A pair of facilities aimed at the primary & secondary markets were the most relevant to the corporate bond market as these programs essentially purchase shorter-term investment-grade corporates and related exchange-traded funds.
    • We believe the rapid repricing of risk in the corporate bond market has tilted the medium-to-long-term risk-reward profile back in favor of investors and makes it an attractive market for some value investors. From current valuations, corporate credit has historically outperformed government bonds and often managed to keep pace with equities in the initial leg of a recovery.
    • This theme can be extended to the Canadian preferred share market, which hit a fresh all-time low in price terms on Mar. 23. We view this market as down, but not for the count, as yields in excess of seven percent are available on a diverse mix of structures, and companies must continue to serve this dividend stream unless common equity dividends are reduced to $0. Our guidance is to maintain or add exposure.

    Stabilization signposts

    As financial markets continue to work through this challenging period, Lascelles will be monitoring a number of factors that might signal some stabilization or turning points. The list starts with developments that could theoretically arrive fairly soon, and finishes with items that will likely take longer to achieve:

    • Further significant enhancements to containment, border control, and disease testing efforts
    • Further major government stimulus announcements
    • A decline in the number of new daily cases in Italy
    • A decline in the number of new daily cases in the U.S.
    • A decline in the daily fatality rate
    • A decline in the total number of people actively sick
    • The development of an important therapeutic treatment for COVID-19
    • The end of quarantining
    • A return to economic growth
    • The development of a vaccine

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    Have markets found a bottom?

    March 23, 2020

    By RBC Economics

    After one month of declines, 10,000 points off the Dow and a lot of “announcement indigestion,” RBC’s Chief Economist Craig Wright says markets are still searching for a bottom. They’re unsure of how to price so much new risk, all at once. Central banks are also struggling to assert themselves, while governments have not been able to get enough new money into the economy. Even when the trillion-dollar checks are cut, will consumers spend and businesses invest?

    RBC Economics provides RBC and its clients with timely economic forecasts and analysis. For more economic research, please visit RBC Economics. Listen to more 10 Minute-Take audio clips at RBC Thought Leadership.

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    Audio commentary: COVID-19 and the outlook for U.S. equities

    March 23, 2020

    As the uncertainty and volatility from COVID-19 continue to spread, we spoke with Lori Calvasina, RBC Capital Markets head of U.S. Equity Strategy, about the outlook for U.S. equity markets. She told us what she’s observing from the situation’s evolving dynamics, which sectors are showing potential, and what the implications are for the earnings picture.

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    Central bank policies are in a race with coronavirus

    March 19, 2020

    By Thomas Garretson, CFA

    The Fed and global central banks are moving fast to keep the financial system running as economic activity risks slowing to a walk.

    Read the full article.

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    Fiscal stimulus joins the fight against coronavirus

    March 19, 2020

    By Frédérique Carrier

    We look at governments’ “antiviral injections” of cash, which are critical to buttress economies against the economic threats posed by the pathogen.

    Read the full article.

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    A crisis of confidence

    March 19, 2020

    By RBC Economics

    It’s still early days but indicators are beginning to show the widespread anxiety gripping consumers and business alike. By our count, the Conference board’s Canadian consumer confidence indicator registered its largest monthly decrease (32 points) on record. Like many other countries, Canada has taken bold steps to contain and slow down the spread of COVID-19. With these necessary measures in place it’s likely that things will look worse before they look better and we could see confidence continue to fall.

    A plunge in confidence adds to the broad narrative we’ve seen in financial and commodity markets. Since February 20, Canada’s TSX is down 35 percent slightly more than the 30 percent drop in the global stock index. Oil prices have fared even worse, as they weather a twin crisis; one of confidence (low demand) and over supply. Despite recently announced fiscal and monetary stimulus we are already seeing businesses announce layoffs. This isn’t surprising given the latest CFIB survey shows businesses are now expecting their performance to be weaker in the next year. How Canadians respond to this downturn depends largely on how quickly we can see signs of normalcy emerging. For now it’s too early to tell when that time will come.

    For more economic research, please visit RBC Economics.

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    Bank of Canada commits to do what’s necessary to keep system running

    March 18, 2020

    By Dawn Desjardins, VP & deputy chief economist, RBC Economics

    The Bank of Canada Governor did not make any new policy announcements today but ran through the long list of policies put in place to support the financial system and ensure that credit is available to households and businesses. Governor Poloz also reaffirmed that actions to-date are not the end of the line for monetary policy and said the bank is prepared to do whatever is needed for the financial system to continue to function.

    The bank has reacted rapidly to the evolving crisis having reduced the policy rate by 100 bps since March 4 and announcing a myriad of actions. As far as additional policy measures, the bank has been clear that there are more policy levers that could be pulled in the toolkit. These include lowering the overnight rate to the lower bound of 0.25 percent and employing additional non-traditional measures. These measures include forward guidance–committing to keeping stimulus in place until certain conditions are metand the outright purchases of government securities and corporate bonds. The BOC can also offer longer-term funding to banks linked to loans being given to certain sectors and while it is possible for Canada to enter into a negative interest rate regime, policymakers consider this to be a last resort. Today, the Governor said what's important is that the programs can be scaled up or down as needed.

    The fallout from the crisis has been widespread across all financial assets with equities down 32 percent from the Feb. 20 peak and credit spreads blowing out. This means banks have seen their funding costs rise exerting upward pressure on mortgage rates. This is creating challenges for households about to reset their mortgage rate or those with a variable rate mortgage. Last week, several programs were announced to help the flow of credit to consumers and business including the purchase of mortgages from lenders that will provide additional loanable funds to financial institutions. The Governor today said some of the programs set up last week were initiated and have already been effective in reducing mortgage spreads.

    Outside the bank and government measures announced, the private sector is also working to help Canadian households manage through this period with Canada’s banks allowing customers to defer mortgage payments for up to six months if faced with disruptions associated with the crisis.

    For more economic research, please visit RBC Economics.

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    Audio commentary: Coronavirus outbreak and investment implications

    March 17, 2020

    An interview with Janet Engels, head of the Portfolio Advisory Group- U.S., discusses the latest thoughts on the unfolding coronavirus outbreak and the investment implications.

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    A global pandemic and its impact on financial markets

    March 17, 2020

    By RBC Capital Markets

    RBC recently hosted a global call and gave perspective on the equities, FX and oil markets as well as the North American and European economies more broadly. During the call our experts discussed in detail how we are positioning within equities, our outlook for FX, oil and the monetary and fiscal policy responses to the spread of COVID-19.

    Tom Porcelli, chief U.S. economist

    • A contraction in U.S. economic activity is expected in Q2. RBC’s base case is for an outright contraction in output with services consumption being particularly hard hit. If COVID-19 follows similar pattern as other viruses and begins to fade as spring rolls around, the economy could stabilize in Q3 and re-accelerate modestly in Q4.
    • Newly announced fiscal measures are being under-appreciated by the markets, as an example: $50B in loans through the Small Business Administration (SBA) and pushing back tax filing date beyond April 15 would be the equivalent of $200B of aid. The goal should be to alleviate the cash crunch that many businesses are enduring. That is how policy makers can help mitigate job losses.
    • There are also “automatic stabilizers” that need to be considered. The ability to refinance mortgages and lower energy prices are, on net, additive for U.S. consumers. Again, these could help mitigate some of the strain on consumer balance sheets.
    • There is no doubt the Fed will do even more. The Fed has other tools at its disposal beyond just cutting rates to the Zero Lower Bound (ZLB). Further action on QE and possibly restarting some of the “alphabet soup” of lending programs witnessed during the Financial Crisis are surely going to be considered in the name of ensuring ample market liquidity.

    Lori Calvasina, head of U.S. equity strategy

    • RBC lowered 2020 S&P 500 price target forecast to 3479 from 3460 with one percent growth expected vs. seven percent previously. We expect the brunt of the pain across U.S. equity market to occur early on in the year with the bulk of the economic impact in the new year and a recovery slowly trickling as news about the virus improves.
    • Reduced 2020 S&P EPS forecast to $165 from $174 (five percent reduction), to reflect a significant but short-term impact of the virus.
    • Real GDP forecast is for a fall of one percent in Q2 with a stabilization in Q3 and a recovery in Q4, with 100 bp of additional Fed rate cuts, a slowdown in industrial production in Q3, margin contractions of about 25 bp, some modest pickup in share buybacks v.s. Q4.
    • U.S. equities are pricing in a recession. This may be premature, however. We anticipate an expected decline of earnings of about ten percent, less severe than we have seen in past recessions, with a median earnings decline of 17 percent.
    • On positioning, we have moved to ‘neutral’ on growth vs. value against a previous bias on value. We upgraded healthcare from market-weight to overweight, lowered financials from overweight to market-weight.
    • On sector ratings, generally, we want to have a balance between growth (Healthcare), defensive (Utilities) and cheap cyclicals (Industrials).

    Peter Schaffrik, head of european rates and economics strategy

    • Situation is dramatic in Italy because early measures were not taken fast enough and the health system is now overwhelmed, and it looks like a humanitarian catastrophe despite very strong measures in place. Will spread to the rest of Europe in a matter of time, with France, Spain, Austria, Belgium, Germany, Ireland closing all schools and many businesses.
    • The economic activity slowdown will be significant. The authorities are responding with monetary action: rate cuts by 50 bp by the BoE.
    • The corporate sector as a whole is facing severe constraints because revenues are falling and, therefore, they need liquidity to bridge this period of time – however long or short it may be. Liquidity provision measures are key: the BoE is providing a term lending facility and the ECB has rolled out a new TLTRO and increased QE program with another $20B euros, and capital relief measures for the banking sector. However, this will not be enough and governments and fiscal authorities are being called upon. What is needed is a tax moratorium to help corporates and guarantees from governments for bank loans.
    • EU could mull suspending debt level limits as set by the Stability and Growth pact.

    Elsa Lignos, global head of FX strategy

    • Positioning in the majors (EUR/USD, USD/JPY) is close to neutral while options market looks broken. Both the yen and euro have recorded substantial moves in both directions over the past days.
    • Key point to focus is on U.S. front end rates - not because it drives speculative positioning but what it means for structural asset allocation and hedging decisions on those underlying assets.
      With the Fed slashing rates and pumping in liquidity to ease funding pressures, we expect a persistent drip of yen and euro buying throughout the year, to reach levels not seen in a long time.
    • Canadian $: some weakening already but further room for downside based on our fitted framework.
    • Sterling: EU-UK negotiations going on in the background though largely being ignored. UK government issued significant fiscal & monetary stimulus package last week, but the country is in a situation of triple deficits (budget, current account, private sector savings) which makes fiscal stimulus potentially sterling-negative.

    Craig Wright, chief economist

    • We expect Canada to fall into a recession this year with activity forecast to contract in the second and third quarters, leaving annual growth at a meagre 0.2 percent The depth, breadth and duration of the recession and the strength of the recovery will depend on the response of monetary and fiscal authorities.
    • Investor, business and consumer confidence are all struggling from the shocks associated with COVID19 and the severe dislocations in energy markets.
    • Consumers in Canada are not well positioned for these shocks given the elevated debt levels. The housing sector is expected to soften over the next couple of quarters as uncertainty with respect to the economy and income prospects outweigh support from lower interest rates.
    • The Bank of Canada is expected to continue to lower interest rates with the overnight rate expected to fall to 0.25 percent over the next couple of months. Fiscal policy is also ramping up to offset some of the economic pain with large stimulus expected given Canada’s solid federal fiscal position.

    Michael Tran, global energy strategist

    • Unchartered situation across oil markets with both a price war between Saudi Arabia and Russia and a global pandemic, a negative supply shock and a negative demand shock all happening at the same time.
    • Since OPEC failed to agree a large production cut of 1.5M b/d, and Saudi Arabia increased production to a record high of 12.3M b/d, the market find itself awash with oil with a surplus of over 4M b/d globally.
    • Without the OPEC cut, the market is left to its own devices to search for self-balancing mechanism.
      In order for prices to recover, demand must either improve or supply has to go down. Given the spread of COVID-19, we have cut our demand forecast by one million b/d. We cannot count on demand bailing out the market over the nearer-term: supply will have to go down ultimately. Russia and Saudi Arabia are gridlocked, with every oil producing country and company caught in the crossfire, U.S. shale is therefore most likely to be the first to buckle. After a tremendous amount of growth over the past decade with the U.S. shale boom, at $40 US a barrel, production starts to struggle. We fear a long, protracted price war and therefore expect WTI prices averaging the mid-30s for much of the balance of the year.
    • The only bright spot is Chinese activity appearing to be rebuilding and improved markedly over the past two weeks.

    For more coverage from RBC Capital Markets, please visit their website.

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    Market update: Going to extremes

    March 17, 2020

    By Kelly Bogdanova, Patrick McAllister, CFA and Mikhial Pasic, CFA

    As more of North America and Europe shuts down in order to mitigate the rapid spread of COVID-19, a recession in both regions looks more likely. This reality, combined with the still numerous uncertainties about the disease’s toll and duration, has inflicted further damage on the equity market, and disrupted segments of the fixed income and commodity markets. The S&P 500 has fallen nearly 30 percent from its mid-February peak, with other developed equity markets sharply lower as well.

    Meanwhile, governments are not only implementing unprecedented restrictions to stem the spread of the disease but also are putting forth aggressive stimulus initiatives—along with major central banks—in an attempt to blunt the economic damage. Following is an assessment of where things stand in this fast-moving crisis from RBC economists and strategists, and the Global Portfolio Advisory Committee.

    Stimulating potential?

    Markets have yet to respond positively to announced or planned stimulus efforts by major central banks or G7 governments. Are these institutions on the wrong track?

    • RBC Capital Markets, LLC Chief U.S. Economist Tom Porcelli argues that the Fed is “not done” stimulating, and the U.S. government is just beginning. He wrote, “Moreover, we maintain, there is a lack of appreciation for some of the fiscal policies that were already floated. This point should not be lost in the noise. Help to the small business community is critical. Overall, we maintain our view that most of the authorities are basically doing the right thing, and once we get beyond the ugly ding to [economic] growth that is coming, policies in place should allow for growth to start the process of healing in the second half [of the year].”
    • Porcelli also points out the need for balanced consideration of on-the-ground economic activity. He wrote, “We think while there is a heavy impetus to write off those areas of the economy that are heavily impacted by social separation, there is little credence given to the potential offsets via increased spending n ‘stay-at-home’ goods and services. The situation naturally leads to one of growing pessimism and ‘worst-case-scenarios’ as becoming the base case. But perhaps we are underestimating the ability of companies to adapt.”

    Recession realities

    Despite being encouraged that authorities seem willing to throw the kitchen sink at this crisis, we’re not Pollyannaish about the economic risks. Because of the sudden, exogenous shock, it is increasingly looking like the coronavirus pandemic could be the first health crisis to cause a recession in developed economies in the modern era.

    • Given the significant number of lingering uncertainties associated with the spread of the virus, RBC Global Asset Management Inc. Chief Economist Eric Lascelles believes it’s prudent to evaluate the risks according to three different scenarios: positive, medium, and negative. At this stage, his base-case forecast is that things play out according to the “medium” scenario, which is somewhat more pessimistic than he estimated previously. This scenario assumes a subtraction of one percent to two percent of GDP growth in developed economies for the year. This would result in a recession in Europe (even before the crisis, growth there was weak), slightly positive growth in the U.S., and roughly flat growth in Canada in 2020.
    • While it is “still too early to observe significant economic damage in the developed world,” there is downside risk to this “medium” scenario. Lascelles wrote, “… let the record show that even the U.S. and Canada are now more likely than not to suffer technical recessions as their economies decline for two consecutive quarters.”
    • Gauging recession risks is more challenging due to the exogenous and swift nature of the coronavirus shock. Normally, our favorite leading economic indicators can pick up weaknesses in the U.S. economy and provide a good sense of when a recession could appear, often six to 12 months ahead of time. However, in this case, traditional data is less useful because developments are unfolding so rapidly, and even the best leading indicators signal with a lag.

    Crude conditions

    The crude oil collapse poses additional risks for energy-centric economies and energy sectors of all major oil-producing countries.

    • Regarding the price war between Saudi Arabia and Russia, RBC Capital Markets, LLC Commodity Strategist Michael Tran asks the all-important question, who will blink first? Neither, it will be the U.S. shale industry, he believes.
    • President Donald Trump’s plan to fill the strategic petroleum reserve “to the very top” is a constructive development for the oil market as it is equivalent to mopping up 20 days of the excess global supplies, according to Tran. However, he cautioned, “While helpful on the margin, such policy pales in comparison to a coronavirus-plagued [oil] market that is measured in months or a price war that is expected to last several quarters or longer.”
    • One of the biggest near-term challenges for the crude oil market that differs from previous shocks is the potential for a severe and sudden decline in gasoline demand, especially in the U.S. It is the world’s largest gas guzzler by far. To put this in context, Tran noted that “the entirety of China could cease driving and that would amount to a demand hit that is softer than if U.S. gasoline demand were curbed by 30 percent.”

    Riptides through bond markets

    The bond market has not been spared from the volatile market conditions.

    • Price discovery has been very challenging for market makers thanks to swings in government bond yields that have been both large and frequent. A notable example of this can be found in the trading activity of the most actively traded U.S. Treasury bonds, as dealers reported bid-offer spreads that were about 10 times wider than normal.
    • Trading conditions were even more challenging in the corporate bond market, as corporate bonds have been a popular source of funds. As a result, many corporations have not benefited from the recent move lower in government bond yields, and they have actually seen their cost of debt rise back to mid-2019 levels.
    • These unwelcoming conditions have shut down the new issue market, and this has incentivized borrowers to shore up liquidity where they can. To this end, a number of companies reported drawn down bank lines.

    Canadian equities and the dollar

    • After underperforming global peers amid the recent plunge in oil prices, the S&P/TSX Composite Index is trading at a forward price-to-earnings multiple of 11.4x, compared to 15.1x at the start of the year and its longterm average of 14.5x. Despite a seemingly attractive valuation, we believe investors should maintain a defensive bias as economic risks and the earnings outlook are notably tilted to the downside.
    • The uneven representation of sectors in the Canadian market (i.e., Energy and Financials account for roughly 45 percent of the benchmark) brings with it particular challenges. With limited visibility on how the COVID-19 outbreak and the global oil price war might play out, we are mindful of the risk that business activity disruptions could last longer and inflict more durable damage to the Canadian economy than what markets currently anticipate. Furthermore, we fear that the Canadian household sector is ill-prepared to weather an economic downturn in light of elevated debt burdens and a tepid savings rate.
    • Balance sheet stability is likely to become the top priority among energy companies and investors alike. Energy companies are already cutting production plans and capital expenditures, with dividend payouts also in the crosshairs.
    • The banks remain the most important sector in Canada. It will be in focus as investors gauge the impact of low interest rates, lower overall economic activity, weak energy prices, and the ultimate magnitude of credit losses lurking in bank loan books. Direct oil & gas exposure is less than it was five years ago, but banks may have to contend with more broad-based credit weakness should the economic outlook darken. We remain comfortable that the Canadian banking sector has strong capital positions with which to absorb any future losses. Furthermore, the dividend yields that range from over five percent to over seven percent offer some level of support and should be sustainable under economic scenarios more dire than what we contemplate as our base case. Nevertheless, we believe investors in the sector will need to be patient and able to stomach the kind of volatility that we expect to see through this period of meaningful uncertainty.
    • The Canadian dollar has sold off sharply along with the equity market and in particular with the recent fall in energy prices. It may remain under some pressure until more clarity emerges on the outlook for the Canadian economy and the energy industry more specifically. 

    Profits pressures

    Corporate earnings estimates are being reassessed across the board, in all major equity markets. Uncertainty about the spread and duration of the pandemic is making the process more difficult. Here again, employing scenario analysis is useful.

    • RBC Capital Markets, LLC Head of U.S. Equity Strategy Lori Calvasina recently lowered her S&P 500 earnings estimate from $174 to $165 per share. This assumes one negative quarter of U.S. GDP growth in Q2, and economic stabilization beginning in Q3. In this scenario, a recession would be avoided, as those contractions typically feature at least two consecutive quarters of negative growth.
    • But with economic risks on the rise in the U.S., we think it’s prudent to consider a recession scenario. If this were to occur, Calvasina estimates there would be an additional, meaningful hit to corporate profits. S&P 500 earnings could retrench to $149 per share in 2020, much lower than her $165 non-recession estimate. This harsher scenario would represent an 8.6 percent year-over-year decline in earnings growth compared to the $163 achieved in 2019.
    • Markets usually don’t wait around to see whether a recession will materialize before they factor that into stock prices. We think the U.S. and other equity markets have already begun to “price in” (factor in) a recession. This is one of the reasons the declines have been so swift and vicious, in our view. The S&P 500 is already in the “recession zone.” In the 12 U.S. recession periods since the late 1930s, the average and median declines of the S&P 500 during or adjacent to those episodes were 32 percent and 24 percent, respectively. However, there was wide variation among those 12 episodes, with the most moderate decline being only 14 percent and the most severe at 57 percent, the latter of which occurred surrounding the global financial crisis in 2008–2009. During the coronavirus crisis, the S&P 500 has fallen almost 30 percent from its all-time high, which means “the stock market is now baking in a recession,” Calvasina points out.

    Darkest before dawn

    RBC’s economists and strategists continue to believe this troublesome period for many countries, and markets, is a transitory shock.

    • There is no doubt in our minds that some companies are going to face serious hardships through this period and even afterwards—signs of distress among the hardest-hit industries and requests for government assistance are starting to accumulate. But we believe many industries will begin to heal and get back to work after the worst of the virus passes, and some industries will help lead the way out.
    • As Lascelles so aptly put it on a recent conference call, equity investors are buying a share of future earnings of companies—not just for the next few months or even the next year. Long-term investors are buying into a multiyear stream of earnings. He does not believe this pandemic will cause a permanent hit to the profits of most companies. Not even the Spanish flu of 1918—a much more deadly pandemic—caused a permanent hit to corporate earnings.
    • Calvasina will continue to re-evaluate her U.S. earnings targets as developments surrounding the virus and its economic impact begin to crystallize. She wrote, “For now, we continue to believe that the bulk of the pain in stocks will occur early in the year, with the bulk of the economic impact coming in 2Q/mid-year, and a recovery trade taking hold once the news flow around the coronavirus improves and/or the valuation appeal of stocks becomes more apparent.”
    • We believe the massive stimulus efforts by governments and central banks, not to mention the prudent steps that millions around the world are taking to stem the spread of the disease, can go a long way toward mitigating the damage to the economy.

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    Uncertainty unleashed: Sizing up the coronavirus impact on markets and the economy

    March 12, 2020

    By Kelly Bogdanova

    While recession risks are rising, financial system stress is nowhere near 2008–2009 levels. We diagnose the current market and economic situation.

    Read the full article.

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    Market update: Vise of volatility tightens

    March 9, 2020
    By Kelly Bogdanova and Mark Bayko, CFA

    As if the further spread of coronavirus (COVID-19) wasn’t enough for equity and fixed income markets to contend with, the collapse in crude oil prices has exacerbated volatility and heightened economic uncertainties.

    Markets are having a difficult time gauging the potential knock-on effects of the coronavirus and crude oil rout for economic growth as well as  corporate sales and profits, and the impact of funding for businesses. Following are thoughts about key aspects of this challenging period from RBC economists and strategists, and the Global Portfolio Advisory Committee.

    Coronavirus: Some silver linings

    Developments surrounding the spread of the virus—both positive and negative—are moving fast.

    • On the positive side, RBC Global Asset Management Inc. Chief Economist Eric Lascelles points out, “Within China, the improvement is truly remarkable.” Rates of new infections have plunged, and as tens of thousands have been declared virus-free, the number of those currently infected has receded to less than 19,000 of the almost 81,000 originally infected. Lascelles wrote, “China—responsible for 77 percent of the world’s cases—has managed to control the disease and is now in the process of restarting its economy. This must surely bode well for the rest of the world.”
    • Furthermore, he said, “It is extremely heartening that South Korea also appears to have brought its outbreak under tentative control. The number of new cases in Korea peaked at over 800 new cases per day, but is now down to less than 400 daily and steadily falling.”
    • Outside of Asia, infection rates are accelerating, which is a concern to us. Containment and quarantine efforts have ramped up meaningfully in Italy, which should help to arrest the spread of the virus going forward in this country. Infection rates may continue to accelerate in other nations, including in the U.S., as reporting and testing improves. There could be a need for stricter containment efforts in North America and Europe before we see the rate of infection begin to slow in these regions.

    A call for the Fed to “get on with it”

    While the equity and crude oil markets have stolen a big share of the headlines, it’s the fixed income market that has absorbed historic moves.

    • On Mar. 9, the entire Treasury yield curve—from short-term bills all the way out to the 30-year bond—was below 1.0 percent as investors worldwide piled into the relative safety of U.S. bonds. The yield on 10-year and 30-year Treasuries plunged as low as 0.3137 percent and 0.6987 percent, respectively, midday during the trading session. The same day, the German 10-year yield briefly cascaded down to -0.907 percent.
    • Considering how low Treasury yields have fallen, RBC Capital Markets, LLC Chief U.S. Economist Tom Porcelli said, “nobody should be surprised” if the Fed comes out and cuts rates by an additional 100 basis points to the zero percent to 0.25 percent lower bound. Even though he thinks such a rate cut “will have virtually zero economic impact” amid coronavirus fears, if cutting by this magnitude allows the Fed to demonstrate it is providing maximum help and places a greater burden on the federal government to step in with more fiscal spending, then the Fed “should get on with it.” Porcelli added, “Bridge loans for corporates and small businesses perhaps managed by the Fed (through the banking system) and backed by the Treasury would be a start.” 
    • The Trump administration’s announcement on Mar. 9 that it will meet with lawmakers to discuss providing assistance to Americans who are suffering financially due to coronavirus risks and to businesses that are being seriously impacted, including small businesses, is a step in the right direction, in our view.

    Credit market in focus

    Beyond much-needed fiscal stimulus and movements in sovereign bond yields, we are closely monitoring developments in the corporate bond market.

    • After a multiyear trend of declining corporate bond yields, various gauges of borrowing costs rose rapidly in recent days. This is notable given this increase in borrowing costs is a function of investors demanding greater compensation above government bond yields for the risks they are taking (aka larger risk premiums), given government yields have recently declined to record lows.
    • Companies with weaker credit profiles and those in certain industries facing specific challenges, such as energy and leisure, have been most impacted for now. But should other companies encounter sustained difficulty in accessing credit on reasonable terms, it could have significant implications for the broader economy and may imply higher borrowing costs for companies looking to refinance maturing debt.

    Oil: A protracted struggle?

    The crude oil market has suffered a series of setbacks so far this year that is either directly or indirectly linked to the coronavirus outbreak. This contributes to economic risks in many oil-intensive countries.

    • First, crude oil weakened when the coronavirus began to raise risks for global economic growth.
    • Second, it slumped more when competing proposals by Saudi Arabia to further cut production due to coronavirus-related economic risks, and by Russia to extend the existing production limits, failed to gain support at the recent OPEC+ meeting. Without an extension or new deal, the production limits that had been in place will expire on Mar. 31.
    • Third, crude oil dropped even further when Saudi Arabia, in response to the OPEC+ meeting impasse, sharply lowered its oil prices in an attempt to gain market share, and announced plans for a significant production increase. This development tipped oil over the edge, pushing WTI crude oil down nearly 25 percent on Mar. 9 to $31.13/barrel (bbl), the biggest single-day percentage decline since the 1991 Gulf War. Brent fell to $34.36/bbl. These oil benchmarks began the year at $61.06/bbl and $66.00/bbl, respectively.
    • Neither the Saudis nor the Russians have slammed the door shut on cooperating, but our analysts are skeptical. RBC Capital Markets’ commodity team wrote, “While OPEC leadership retains hope that the price collapse will be a catalyst for a reconciliation between the two oil heavyweights, President Putin may not quickly capitulate. We fear that it could be a protracted struggle, as Russia’s strategy seems to be targeting not simply U.S. shale companies—but the coercive sanctions policy that American energy abundance has enabled.” 
    • Our research sources believe that the breakeven oil price for OPEC nations is over $50/bbl, suggesting that OPEC producers would likely be running a fiscal deficit at current oil prices. We expect most oil producers around the world will have to significantly scale back production and capital expenditure plans.

    Canadian equities and the dollar

    • Not surprisingly, the Canadian equity market has underperformed global peers in the wake of the recent plunge in oil prices. The broad Canadian equity market, as represented by the S&P/TSX Composite Index, is trading at a forward price-to-earnings (P/E) multiple of 12.9x, compared to 15.1x at the start of the year and its long-term average of 15.5x. Despite the more compelling valuation, we believe investors should maintain a defensive bias as economic risks and the earnings outlook are notably tilted to the downside.
    • The uneven representation of sectors in the Canadian market (i.e., Energy and Financials account for a combined 44 percent) brings with it particular challenges. With limited visibility on how the COVID-19 outbreak and the global oil price war might play out, we are mindful of the risk that business activity disruptions could last longer and inflict more durable damage to the Canadian economy than what markets currently anticipate. We suggest investors consider markets outside of Canada for exposure to sectors that are under-represented in Canada.
    • Balance sheet stability is likely to become the top priority among companies in the energy industry—and should be for investors in the sector as well. Energy companies are likely to cut production plans and capital expenditures, and some may be forced to revisit their dividend policies in order to shore up their balance sheets.
    • The banks remain the most important sector in Canada. It will be in focus as investors gauge the impact of low interest rates, potentially lower overall economic activity, and the exposure of their loan books to the oil and gas industry. On the latter front, the exposure appears manageable but investors should expect the banks to raise their credit provisions in anticipation of future potential losses should oil prices remain depressed. We remain comfortable that the Canadian banking sector has strong capital positions with which to absorb any future losses. Furthermore, the dividend yields that range from over four percent to as high as six percent offer some level of support, particularly relative to very low bond yields. But investors in the sector will need to be patient and willing and able to stomach the kind of volatility that we expect to see through this period of meaningful uncertainty.
    • The Canadian dollar has unsurprisingly sold off with the equity market and in particular with the recent fall in energy prices. It may remain under some pressure until more clarity emerges on the outlook for the Canadian economy and the energy industry more specifically.

    Our bottom line

    The health of the U.S. economy—specifically, whether it avoids a recession or succumbs to one—plays a crucial role in the outlook for global equity markets.

    • Before the coronavirus began to pressure financial markets, the anticipated directions for the global economy and earnings growth were positive. The risks to our macroeconomic views are now biased to the downside as the outbreak and the related crude oil headwinds should result in slower activity. The question is both for how long and by how much.
    • At this stage, Lascelles believes the U.S. may suffer one quarter of negative growth due to the coronavirus headwinds but should be able “to squeeze out a modicum of economic growth in the adjacent quarters thanks to its higher natural rate of growth.” Thus, a recession would be avoided.
    • If a recession doesn’t materialize in the U.S. this year, most stock markets should be able to meaningfully climb from the current correction levels by the end of 2020, in our view. However, the probabilities of a more adverse economic outcome are higher than when the year began.
    • We will continue to evaluate our stance on the equities and fixed income markets in the days and weeks to come depending on how the risks evolve.

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    As coronavirus spreads, what’s the economic toll?

    March 3, 2020

    By Eric Lascelles

    How is the scope of the outbreak evolving, and to what extent could the coronavirus sap Chinese and global economic growth?

    Read the full article.

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    Earlier coronavirus coverage and perspectives:

    Fixed income market brief: Do central banks have a vaccine?

    Feb. 27, 2020

    By Thomas Garretson, CFA

    As is usually the case in the face of most periods of economic fear and uncertainty, markets look to central banks to ride to the rescue. However, with the global uncertainty pertaining to the coronavirus outbreak, it seems that markets are instead looking to central banks and asking if there is even anything they can do.

    Of course, the biggest risk during these types of events is from a pullback in spending by both consumers and businesses amid heightened uncertainty, but if both sectors are reluctant to spend, travel, and borrow, no amount of cheap money is likely to help. But that hasn't stopped markets from pricing further easing from many of the world's largest central banks.

    That's not to say that rate cuts won't help. Beyond reducing interest rates, changes in monetary policy can also serve to support markets through the sentiment channel, or via the belief that central banks stand ready and willing to act. And we expect that they will.

    But the first two weeks of March may prove crucial in terms of assessing both the impact of the coronavirus, and the timing of any central bank response. The middle of the month sees the central banks of the U.S., Europe, and Japan set to meet. Of the three, the Fed is expected by markets to take the lead and to deliver a rate cut. The only question now is whether it's a standard 0.25 percent move, or if it gets aggressive and delivers 0.50 percent of easing, which would take the fed funds rate to a range of 1.00 percent to 1.25 percent.

    But beyond that, the market is looking for even more easing to follow, with the fed funds rate expected to end the year below one percent, according to market probabilities. However, in our view, we think the Fed is past the point of policy "tweaks." In a scenario where it is cutting rates below one percent, we believe the Fed would simply take rates back to the zero percent lower bound and hope to fight another day.

    In the U.S., global growth concerns and rate cut expectations have driven Treasury yields to fresh all-time lows, with the benchmark 10-year Treasury yield falling to just 1.26 percent on Feb. 27. We now see scope for the U.S. 10-year Treasury yield to fall below one percent in the weeks and months ahead. In Europe, the entire German sovereign Bund curve is back below zero percent, increasing the global stock of negative-yielding debt back to $14 trillion.

    The answer then to the coronavirus conundrum is a combination of monetary and fiscal policy, in our view. China has already announced significant plans to support local businesses, and we expect that global governments will step up to offset any economic weakness, which broadly is still expected to be temporary. While uncertainty is unlikely to dissipate in short order, we look for central banks and governments to take decisive action if needed, as it will require a coordinated effort.

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    Equity market brief: Under pressure

    Feb. 27, 2020

    By Jim Allworth 

    Over the past few weeks there have been several things worth worrying about—chief among them the impact of the coronavirus and growing uncertainty around U.S. electoral politics. For the first eight weeks of the year investors didn't seem to care about either until, abruptly, they did. Now uncertainty has taken hold, sending global stock markets into the ditch.

    Whatever the eventual outcome of the virus crisis, it will have already blown a large hole in Q1 GDP growth for China, with knock-on effects of varying degree across Asia. The impact in North America and Europe should be much smaller, in our view, but that can't be quantified with any certainty at this point.

    Management guidance accompanying Q4 2019 earnings releases in January and February mostly took the form of "too early to tell." Q1 comments beginning in mid-April are likely to continue painting a cautionary and indeterminate picture. Even assuming the outbreak peaks and begins receding by early summer, clarity around the sales and earnings costs of this health catastrophe will be a long time coming.

    What is likely to arrive sooner will be more fiscal stimulus from governments. From China first and foremost, but also from Japan where domestic demand was dealt a body blow by a Q4 sales tax hike that has been exacerbated by China's abrupt slowdown. In the UK and Europe, plans were already afoot for additional government spending to offset trade concerns as the final Brexit deal is negotiated and weak exports into China take a further toll on the German economy. These efforts are likely to be advanced and probably entail greater-than-previously contemplated sums.

    In North America, Canada has plenty of budgetary capacity to boost spending, while in the U.S., both the Republicans and Democrats will be eager to establish their bona fides as the "economy-friendly" choice in the lead-up to a hotly contested election in the fall.

    As things stand today, we expect no recession in the U.S. or Canada in 2020, but with GDP growth rates hovering around two percent, an occasional negative quarter can't be ruled out. It is also possible the coronavirus impact turns out to last longer and cut more deeply into the U.S. economy, pushing it into outright recession. That is not our base case, but the probability of this happening is certainly markedly higher than when the year began.

    A weaker GDP profile could be expected to produce weaker-than-anticipated corporate earnings. And earnings estimates for 2020 have been falling, from a wildly optimistic $187 per share for the S&P 500 early last year all the way down to a recent $175 per share, which is still above the long-held, below-consensus call of RBC Capital Markets' Head of U.S. Equity Strategy Lori Calvasina for $174.

    Calvasina estimates the potential cost of the virus on earnings at $4 per share, which could bring her estimate down to $170. Her estimate would fall to $167 per share if the U.S. were to endure a mild recession. Clearly, even lower numbers are possible. So, at the very least, we expect Street conviction around what earnings figure to use to calculate forward price-to-earnings (P/E) ratios will be in flux for at least the next quarter, probably longer.

    In the big and unsettling stock market retrenchment of late 2018, the S&P 500 slumped from a summer peak of better than 18x forward earnings in August down to something less than 15x at the Christmas Eve low. But that happened against a backdrop of (sharply) rising bond yields. The

    10-year Treasury yield jumped from 1.50 percent in August to 1.90 percent in December that year, while corporate bond yields (BBB rated) rose by 120 basis points to 4.70 percent over the full year. Since those peaks, the Treasury yield has fallen to a new all-time low at 1.15 percent while BBB corporate yields have collapsed down to 2.70 percent.

    Low and falling bond yields not only potentially stimulate growth, they also support P/E ratios. At the end of the day, we don't expect the P/E damage of this correction will be as big as that endured in 2018. But we also think it will take some time to fully play out, probably months, conceivably quarters. The damage to all equity markets globally is likely to be directly related to the damage done to the U.S. economy in particular, in our view.

    In the February edition of Global Insight, our parting thoughts in the global equity commentary were:

    “concerns around the coronavirus outbreak will probably go on suppressing investor attitudes for some months to come. As well, American politics will likely deliver occasional market volatility from the start of the primary season in February through at least to the Democratic convention in mid-July.”

    That volatility has driven share prices down further and more rapidly than we expected. If the U.S. economy avoids a recession in 2020, by year end, we expect most stock markets will have advanced meaningfully from today's levels.

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    What investors need to know about the coronavirus correction

    Feb. 27, 2020

    By Thomas Garretson, CFA

    After a brutal week for stocks, markets expected a flurry of Fed rate cuts. But already low Treasury yields only moved to new record lows.

    Read the full article.

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    Required disclosures

    Research resources

    Non-U.S. Analyst Disclosure: The following persons contributed to to the preparation of this publication:

    • Jim Allworth, Mark Bayko, Christopher Girdler, Patrick McAllister, and Mikhial Pasic, employees of RBC Wealth Management USA’s foreign affiliate RBC Dominion Securities Inc.
    • Eric Lascelles, an employee of RBC Wealth Management USA’s foreign affiliate RBC Global Asset Management Inc.

    These individuals are not registered with or qualified as research analysts with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since they are not associated persons of RBC Wealth Management, they may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts.