/Canadian dollar, oil roiled as fear of coronavirus contagion spreads across global markets

Canadian dollar, oil roiled as fear of coronavirus contagion spreads across global markets

The Chinese coronavirus outbreak could dent Canada’s economy just like the severe acute respiratory syndrome that killed nearly 800 people in 2002-03 and cost the global economy billions, according to Scotiabank.

Fear gripped global markets on Monday with slides in Asia and Europe also hitting Wall Street and the Toronto Stock Exchange. The S&P/TSX composite index was down 0.62 per cent at 17,455 by noon, as investors fled risky assets on growing fears over the economic impact of the coronavirus outbreak in China.

The U.S.’s benchmark S&P 500 was also jolted off record highs as China locked down several cities and curbed travel after the coronavirus spread from the city of Wuhan in central China.

The deadly virus that has killed at least 80 so far in China and infected more than 2,700, with two potential cases in Toronto, could limit Canada’s gross domestic product growth by just over 0.1 per cent, the same amount attributed to SARS 17 years ago, Canada’s third-largest bank by assets said in a report issued Monday.

Global oil prices might drop 4 per cent on weaker demand from tourism and air travel, it said. The impact on China’s GDP could be about 1 per cent, about the same as the 2003 event, the bank said.

“While it is premature to predict the path of today’s coronavirus outbreak, we estimate that a SARS-equivalent pandemic today could have a similar impact on the Canadian economy,” Rebekah Young, the bank’s director of fiscal and provincial economics, and Nikita Perevalov, senior economist, said in the report.

“But even in a more challenging scenario where a SARS-like pandemic grips the world, the impact on growth should be small and transitory,” they said, noting that China and Canada are more prepared this time round. “Nevertheless, the contagion of fear should not be underestimated at this juncture.”

The contagion of fear should not be underestimated at this juncture

Scotiabank report

While Canadian gold miners surged Monday as investors piled into haven assets, industrial metal miners slumped as the price of copper and iron ore sank on concerns that global growth could slow.

Gold climbed 1 per cent to a near three-week high to US$1,579.70 per ounce on Monday as mounting concerns over the economic fallout of the coronavirus outbreak sent investors scurrying for safe havens.

Air Canada slipped for a fifth day, taking its plunge to about 12 per cent over that stretch, the biggest drop since June 2016. The airline reported quarterly losses during the 2002-2003 SARS epidemic as travellers avoided Toronto.

Canada Goose Holdings Inc. fell 4 per cent and Gildan Activewear Inc. slipped 2 per cent. Both clothing companies could see a decline in earnings. Ballard Power Systems Inc., the fuel-cell manufacturer that gets more than 30 per cent of its revenue from China, fell as much as 9 per cent. Imax Corp., a Mississauga, Ontario-based company listed in the U.S. that gets more than 30 per cent of its revenue from China, extended last week’s drop, for a six-day decline of about 15 per cent.

Benchmark West Texas Intermediate oil dropped to around US$52.72 a barrel while Western Canada Select crude fell to $29.80, its lowest level since Dec. 2018, as the fear of shrinking Chinese demand pulled commodities down.

With little data available on the spread of the coronavirus at this early stage, fear may be the biggest element markets and the economy have to deal with for now.

The outbreak’s impact on the Canadian economy will likely reinforce some trends in slackening demand and strengthen forecasts the Bank of Canada will cut interest rates this year, perhaps twice to 1.25 per cent from 1.75 per cent, Scotiabank said.

Lyndon Gorospe waits for a family friend while wearing a mask at Pearson airport arrivals, shortly after Toronto Public Health received notification of Canada's first presumptive confirmed case of coronavirus, in Toronto, Ontario, Canada January 26, 2020.

Lyndon Gorospe waits for a family friend while wearing a mask at Pearson airport arrivals in Toronto, Ontario, January 26, 2020.

Carlos Osorio/Reuters

However, RBC Royal Bank differs in its analysis of the outbreak, saying it is futile to predict the impact of coronavirus by comparing it to SARS because the intensity and spread of outbreaks differ.

The shutdown of airports and ground transportation affecting about 50 million people in the region around Wuhan to contain the virus is the main impact on oil prices, but remains a local Chinese shock, Canada’s largest bank by assets said in a new report.

“Coronavirus is a Chinese jet fuel demand story for now and not yet a global demand story,” RBC Capital Markets says in the report issued Monday. “Geolocation data indicates that we have yet to see a drop off in consumer traffic in the busiest Asian airports outside of China.”

The Canadian dollar fell to a seven-week low against the U.S. dollar on Monday, weighed down by falling oil prices.

The Canadian dollar was down against the greenback, which was up 0.3 per cent at $1.3193. It fell to $1.32 per U.S. dollar, the lowest since mid-December.

Coronavirus is a Chinese jet fuel demand story for now and not yet a global demand story

RBC Capital Markets report

The Canadian dollar has been on a downtrend since the Bank of Canada took an unexpected dovish turn last week when it left its benchmark interest rate steady at 1.75 per cent, as expected, but said a future cut was possible as the economy is expected to slow down to around 0.3 per cent in the fourth quarter.

Scotiabank analysts believe the Bank of Canada’s GDP estimate may be optimistic and could slip into a “very mild correction territory,” forcing Governor Stephen Poloz’s hand.

“While the (coronavirus) effect should not be significant enough to trigger a broader economic malaise, but could this finally push Governor Poloz over the line to proactively stimulate the economy in his next rate call?” Scotiabank analysts asked.

“My personal view is that the balance is tilted even more in favour of easing now and away from stability concerns,” said Derek Holt, vice-president and head of capital markets economics at Scotiabank. “Highly stimulative fiscal and monetary policy led households toward high levels of borrowing.

“That can’t be reversed,” Holt said. “Households are now showing multiple signs of exhaustion in this consumption cycle. To cut them off now after having led them along this path risks magnifying downside risks to the economy versus using tactical monetary policy adjustments to ease the transition more gradually.”

With files from Reuters and Bloomberg

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