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Update to Canada Stocks End of Week Report; BMO On the TSX, Loonie and Bonds

· 02/05/2021 11:36

04:21 PM EST, 02/05/2021 (MT Newswires) -- Bank of Montreal in its 'Economic Talking Points' note of this Friday said despite the struggle by the Canadian economy to start the year, the TSX rode the coattails of a rebounding S&P 500 and the ongoing comeback in crude to push back above 18,000. BMO noted WTI hit the US$57 level on Friday, up 9% for the week, and now all the way back to its average level in 2019 (i.e., pre-pandemic). In turn, Brent was nearing $60, WCS was "keeping pace", and natural gas had "flared" close to $3.

Yet, BMO said, even with this broad-based strength in energy, the Canadian dollar was "spectacularly stable" this week, barely budging on net from just above 78 cents. And, according to BMO, one can't pin the lack of enthusiasm on the dismal jobs data, as the loonie actually strengthened on Friday. It said the much bigger weight on the currency was the firming U.S. dollar, and the "growing perception that the growth divergence between the U.S. and others could persist." Canada's "lacklustre and now near-stalled: vaccine roll-out suggests that the economic rebound could lag the U.S. by roughly a quarter, the bank added.

The bond market, BMO noted, also forged through the bad domestic economic news, driven more by rising oil prices and rising prospects for fiscal spending. The Canadian 10-year yield touched the 1% level on Friday for the first time since last March, and a long way from last summer's record low of 44 bps. Critically, BMO said, yields even rose on Friday, despite job losses.

Long-term yields, BMO noted, have made an even bigger move, as steepening has been the dominant theme in 2021. The 30-year GoC rose more than 10 bps this week alone to almost 1.6%, compared with barely above 1.2% at the start of the year.

BMO said: "The upward lurch in long-term borrowing costs is a reminder to all policymakers that there is no free fiscal lunch-an important message as the finishing touches are now being put on this year's round of budgets."