Global Market Insights: CAD drops; still more upside for stocks; housing’s summer retreat

The spread of the Delta variant had investors flocking to the safety of the greenback, yen and Swiss franc last week, lifting the US currency to a nine-month high. Meanwhile, the loonie slipped to a six-month low, as the uncertainty of travel pulled oil prices down. Investors can expect earnings per share and stock prices to continue their climb on the S&P 500 and the TSX for the next year or so. As per usual, the Canadian housing market has slowed over the summer, with sales dipping 3.5% from the previous month. However, Canadians looking to get into the market can expect a reversal of the summer retreat come fall with an expected improvement in the labour market and a rise in immigration.

Scotiabank analysts and economists weigh in on what the pandemic means for currencies, equities, and housing markets.

• The US dollar reached a nine-month high this week owing to market anxiety over slowing global growth from the spread of the Delta coronavirus variant—with contagions accelerating from Australia to the Southern United States. With caution in markets, the USD, the Japanese yen, and the Swiss franc outperformed their peers as investors flocked to safer assets, while high-beta currencies were among the most impacted with risk-off trading and sharp declines in commodity prices.
• The Canadian dollar reached a six-month low this week (USDCAD above 1.28) owing to an 8% drop in WTI crude oil prices to their lowest level since May. Reduced gasoline demand owing to lockdowns and travel restrictions has weighed on oil prices of late while OPEC+ continues to unwind its supply cuts. The metals space also hurt this week as markets brace for reduced Chinese steel output in the coming months as the government acts to curb pollution, while virus caution also reduces domestic demand for the metal. The CAD’s commodity peers, the Norwegian krone, and the Australian and New Zealand dollars also saw steep losses for the week, with the latter two dragged further by new and extended virus lockdowns.
• Next week, markets will be laser-focused on the Jackson Hole economic symposium where central bankers from around the globe will provide hints on their respective policy outlooks. The US Federal Reserve Bank’s Jerome Powell is, nevertheless, expected to stick to guidance that a tapering of asset purchases will not begin until substantial progress has been achieved — likely until December — despite calls from some Fed officials to begin the process as early as September. We expect broad dollar strength to persist as the Fed begins to tighten policy while other major central banks, notably the European Central Bank and the Bank of Japan, lag in their respective rate-hiking cycles.

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

• A prolonged macro cycle supports higher earnings per share and targets. Despite both the TSX and S&P 500 posting double-digit gains and hitting new highs this year, we believe there’s more upside ahead. Granted, the road might be bumpier on account of high valuations increasing the odds of pullbacks, but the uptrend in stock prices appears likely to persist on the back of rising earnings. We refresh our macro assumptions for our economic scenarios from which we derive earnings projections and targets. Overall, our earnings projections are going up across the forecast horizon with our targets adjusted upward.
• Source of returns. Whether you look at North America, Europe, or Asia, equity returns so far this year have been exclusively generated by earnings expansion, while forward P/E ratios have contracted, subtracting from gains. Looking ahead, we believe earnings growth will remain the main driver of equity gains.
• Based on our model, S&P 500 earnings per share (EPS) should come in around US$192 in fiscal 2021, a solid 37% rise from US$172 in April. We expect 2022 EPS to rise 16% to US$223 from US$200 previously, with the uptrend extending into 2023 (US$239; +7%).
  -   We are increasing our 2021 year-end target for the S&P 500 to 4,600 (was 4,300), using 20.5x P/E multiple on our fiscal 2022 EPS forecast. We expect the index could reach 4,800 (+4%) at the end of 2022, implying a 20x multiple on our 2023 earnings estimate.
• Our regression model pegs TSX EPS at C$1,237, a year over year increase of 57% in fiscal 2021. Our model expects TSX EPS to reach C$1,378 (+11%) for fiscal 2022 and $1,479 in fiscal 2023. To achieve our forecasts, the TSX clearly needs strong growth and robust commodity prices.
  -   We are pushing our year-end target for the TSX to 21,400 based on 15.5x our new 2022 EPS forecast. Contrary to the US, we believe the TSX P/E ratio could expand slightly if our scenario plays out. Hence, we’re using a modestly higher valuation multiple (15.75x) to derive our year-end 2022 target of 23,300 (+9%). That would leave the TSX with more upside potential than its US counterpart for 2022.

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

• The Canadian housing market has slowed down for the summer, with sales declining a seasonally adjusted 3.5% in July from a month earlier — its fourth, albeit smallest, consecutive drop. It’s important to remember, however, that this is second highest July on record for sales after 2020 and is 26% (seasonally adjusted) higher than the 2000–2019 July average. Listings fell a whopping 8.8% in the month, the fourth and largest consecutive decline, resulting in the sales-to-new-listings ratio inching back up to 74% — further from its long-term average of 54.5% after easing over the past few months.
• A persistent tightness in the market helped lift the composite MLS Home Price Index (HPI), albeit at a slower pace that the previous months. The HPI rose 0.6% (seasonally adjusted) in July — continuing the trend of decelerating after recording its biggest monthly price gains since 2000 in February and March of this year. Single-family homes were again the main driver of the price-gain deceleration in July, after a short-lived reversal in June when apartments and townhouses experienced the largest deceleration. 
• Listings declined in 25 of the 31 markets we track, led by the greater Toronto area, Vancouver, and Montreal, pushing the number of centres in sellers’ market territory to 17. Of the six markets that saw listings rise in July, Winnipeg’s was the largest. It also had the largest sales increase in July, with the listings likely immediately absorbed.
• July’s slowing housing market does not come as a surprise, given that the factors that triggered the pandemic rally are dissipating as expected, while affordability has been largely weakened and immigration remains on hold. A reversal of this retreat in the fall should not come as a surprise either, as we expect improving labour market conditions and a resumption in immigration to drive up demand, alongside the usual pick-up after Labour Day weekend and the start of a new school year.

— Farah Omran, Economist

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