Small-caps earnings growth should easily exceed that of large-caps despite recent underperformance in the S&P 600. There’s also a strong case for commodities to continue their bull run with copper expected to set a new high and a broad range of commodities from steel to coffee to cotton at multi-year highs. Similar to the U.S., Canadian retail is in growth mode, with most sectors — clothing and gas being the exceptions — outpacing pre-pandemic sales, but that could be dampened by April’s high COVID numbers. Meanwhile, the Bank of Canada’s hawkish turn on rates took the loonie to its strongest level in more than two years, while the US Fed’s more cautious approach left the greenback around its two-month low.

Scotiabank analysts and economists weigh in on what the pandemic means for equities, commodities, retail sales and foreign exchange.


  • Size trade: US small-to-large ratio ready to bounce back After a stellar 59% run up between the end of October and mid-March, the S&P 600, which tracks US small-cap equities, has retreated more than 3%. While the well-deserved pause dissipated acute overbought conditions in the space, the S&P 500 rally has continued unabated (6%), which has led to a steep drop in the small-to-large ratio. The S&P 600 to S&P 500 ratio (0.323) declined almost 9% from its high and is now hovering in a strong support zone. Despite the recent underperformance, we believe the small-cap index remains well positioned to regain leadership. Not only are technicals supportive but fundamentals look great, too, as small-cap earnings growth should easily exceed that of large-cap equities. Bottom-up forecasts peg S&P 600 EPS growth at 59% this year and 19% next year versus 28% and 13%, respectively, for the S&P 500. Here is the best part: small caps are 7% cheaper than large caps. The S&P 600 is trading 20.8 times forward earnings versus 22.3 times for the S&P 500.
  • Broad commodity bull market With the vaccine rollout accelerating, global PMIs surging, and the USD weakening, the macro-economic backdrop remains supportive of commodities. Most have already enjoyed a strong ride in the past year. Copper, for instance, exceeded US$4.50/lb on Wednesday, which is essentially back to the highs seen in 2011. However, that zone could also offer some resistance, especially with overheating conditions appearing. A period of consolidation could be needed. Nonetheless, we still believe copper looks set to make a new high. Copper is not alone posting strong gains. Iron ore, steel, lumber, corn, soybeans, wheat, coffee, cotton, and lean hogs stand at multi-year highs, with some of them at record highs. The negative correlation between the greenback and commodity prices is well known, but the DXY is nearing a key support area (90) again. A break below that level will likely lead to an upside breakout in the CRB index above the 200/210 level. We would watch overheating conditions in the space, which could bring some volatility. Still, if global growth is as strong as hinted by PMIs in the 60+ range, we are likely to see further upside.

—  Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research


  • Canada’s retail recovery is tracking in similar fashion to that of the United States. The value of total Canadian retail sales now stands 8.4% higher than where it was in February 2020 just before the pandemic struck, while US retail sales are 17% higher than pre-pandemic sales. Most retail sectors are into outright growth mode, with the exceptions being gas and clothing sales given the number of people working from home.
  • April’s high number of COVID-19 cases and the ensuing tighter restrictions will likely dampen enthusiasm, but it doesn’t have to be for the full second quarter. That will depend on whether the COVID-19 curve bends enough to ease restrictions and on continued vaccine progress. It also depends on whether consumers and retailers continue to find ways to spend and meet demand through online sales, home deliveries, curbside pick-up and limited traffic. There could still be powerful growth in sales volumes during Q2 making it possible for retail sales to exit on a high note, but we’ll need to monitor the COVID case and vaccine curves for that.

—Derek Holt, Vice-President and Head of Capital Markets Economics

Foreign Exchange

  • The US dollar’s decline in April decelerated this week around its lowest point in two months with limited market activity ahead of Wednesday’s Federal Reserve policy announcement. Although the economic reopening in the US has begun with a bang thanks to a fast deployment of vaccines and sizable fiscal support, the Fed has chosen to take a cautious, highly data-dependent approach — pushing back against tapering and eventual rate hike debates.
  • In contrast, the Bank of Canada’s hawkish turn at last week’s meeting translated into solid gains for the Canadian dollar throughout the week that took it to its strongest level in more than two years — above the previous year-to-date high in early-March. The BoC’s reduction in its weekly pace of bond purchases was accompanied by a stronger outlook that sees inflation sustainably reaching the bank’s 2% target in the second half of 2022, when it would motivate an increase in the bank’s overnight rate. With the BoC set to move ahead of and faster than the Fed, we expect CAD gains to prolong toward the 1.20 mark as rate differentials turn in the currency’s advantage. Near-term risks around the duration of the latest virus lockdowns will act as a headwind, however.
  • FX price action next week will be marked by a series of key data releases in the United States culminating on Friday with April employment reports in the US and Canada. While the latest wave of restrictions in a handful of provinces will likely result in job losses in Canada, survey and high-frequency data point to a blockbuster employment gain in the millions in the US For GBP watchers, the Bank of England’s policy decision on Thursday may see the bank tee up a reduction in its pace of QE.

—  Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist


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