Coronavirus Spikes Canada’s Fiscal Deficit To C$ 343.2 Billion; Markets Tread Cautiously

Summary

• Canada’s fiscal deficit soared to C$ 343.2 billion or nearly 16% of the economic output as the spending on coronavirus-related programs went up
• Much of the COVID support will be financed through new C$ 409 billion bond programs
• Mood in the market cautious; key indices advance marginally

Canada’s fiscal deficit soared to C$ 343.2 billion as the federal government’s expenditure on coronavirus-related support programs hit levels not seen since the World War II.

The Justin Trudeau government projected a budget deficit equivalent to nearly 16 percent of the country’s economic output, with direct support to individuals and businesses reaching C$ 212 billion this year.

Much of this support will be financed through a new C$ 409 billion bond program, including 10-year and 30-year bonds of a combined value of C$106 billion as compared to just C$ 17 billion in 2019-20, according to the Department of Finance papers released on July 8.

In total, the annual gross bond issuance of C$ 409 billion in 2020-21 is C$ 285 billion higher than the C$124 billion issued in 2019-20.

The total bond stock will increase by C$ 317 billion to C$ 915 billion, with nearly 70 per cent of financial requirements to be funded with bonds, said the documents. However, the plan to increase long-term public debt has had a strong impact on yields, which have now risen.

But Finance Minister Bill Morneau said the cost of servicing public debt is likely to become lower this year. The total public debt charges for 2020 is likely to be over C$ 4 billion, lower than the previous forecast, said the minister.

Canada’s Projected Allocation of Gross Bond Issuance for 2020-21

(Source: Department of Finance Canada /Canada.ca)

Market Reaction

The mood in the market remained cautious throughout Wednesday, as the federal government announced the fiscal deficit projections. Canada’s key composite index opened in positive territory, but traded in red for most of the day, before bouncing back in the final hour.

The S&P/TSX Composite Index touched a high of 15,707 points within the first hour of trading, but later fell by 174 points. The index settled at 15,629 by the closing bell, gaining 33.69 points or 0.22 percent in a day.

The Canadian dollar posted a two-week high, trading 0.7 percent higher to the greenback at 74.03 US cents.

The materials sector was the biggest gainer of the day with the S&P/TSX Capped Material Index climbing by 6.48 or 2.06 percent. Other gainers included the information technology and the industrial stocks, which rallied by 0.99 percent and 0.59 percent, respectively.

The top three price gainers of the day were Constellation Software Inc (CSU) from tech sector, Kirkland Lake Gold Ltd (KL) from materials sector, and Fairfax Financial Holdings Limited (FFH) from financials.

Constellation Software Inc (TSX:CSU)

Scrips of the Canadian tech firm jumped by C$ 52.50 or 3.3 percent to C$ 1,612.01, making it the highest gainer by price on Wednesday. The company’s current market capitalisation is C$ 34 billion.

CSU stocks have recorded an astonishing growth of 3,500 percent a span of 10 years and have a current EPS of C$ 15.13. The scrip has posted a 24 percent growth since January this year and has already crossed its pre-pandemic high after bottoming out in March.

CSU acquires, develops, and sells software solutions to specific vertical markets in both public and private sectors. The company serves various markets including auto clubs, beverage distribution, communications, community care, credit unions, hospitality, textiles and apparel and tour operators.

Kirkland Lake Gold (TSX:KL)

Buoyed by gains in the gold index, the Canada-based gold mining and exploration company advanced by C$ 4.53 or 7.6 percent to C$ 64.24 on July 8. Kirkland Lake Gold Ltd (KL) has a current market cap of C$ 17.8 billion and posted a solid Q2 production results, up 54 percent from 2019 Q2. Its stock price has gone up by nearly 87 percent on the TSX index, since bottoming out on March 14.

Kirkland has five producing mines Canada and Australia including Northern Ontario’s Macassa and Detour Lake, and Fosterville gold mine Australia’s Victoria.

Fairfax Financial Holdings Limited (TSX:FFH)

Fairfax Financial Holdings (FFH) was the best financial stock performer of the day in terms of price gain, advancing by C$ 4.05 or 1 percent to settle at C$ 405.30.

Toronto-based FFH is a holding company with insurance, reinsurance and investment management operations via its subsidiaries.

The company yielded 66 percent returns on stock price over a period of eight years (Feb 20, 2011 to Feb 20, 2020). Its scrip fell with the COVID-induced economic slump and has recovered by over 23 percent since March lows.

Meanwhile on the Baystreet, TSX Venture Exchange rose by 13.14 points or 2 percent to 664.80. The top gaining sectors were gold (+2.1 percent), materials (+ 2 percent), and information technology (+ 0.8 percent).