NDP surge leaves Bay Street leery
Tim Shufelt, Financial Post · Apr. 27, 2011 | Last Updated: Apr. 27, 2011 8:06 AM ET
TORONTO . So far, the federal election has elicited but a yawn from Bay Street.
Markets, apparently accustomed to an unsteady Parliament, have proven mostly indifferent to the campaign.
But if there's one turn of events that could pique the interest of corporate Canada, it's the prospect of an NDP government.
"It opens up a lot of uncertainty," said Ted Macklin, a fund manager at Torontobased Guardian Capital L.P. "If we end up with an NDP government, it could be a big reality check in Canada."
Amid the NDP's remarkable surge in popularity, that outcome is now at least being considered within the realm of possibilities.
A new EKOS poll places the NDP in second place nationally with 28% support of decided voters, versus 23.7% for the Liberals.
EKOS pollster Frank Graves called the sudden reversal an "astonishing shift" that could deliver the NDP a "breathtaking" 100 seats, raising the possibility of a coalition government led by Jack Layton.
Many stars would have to align for such an extraordinary scenario. But Stephen Harper's opponents have said little to indicate the 41st Parliament would be a harmonious affair.
"That uncertainty could cause at least a little bit of turmoil on the markets," said Doug Porter, deputy chief economist at BMO Capital Markets.
Add to that the NDP's rising fortunes, which could well translate into greater influence in Ottawa, amounting to a combination of instability and NDP clout that might not sit well with Canadian business, said Camilla Sutton, chief currency strategist at Scotia Capital.
Markets could anticipate a deterioration of Canada's fiscal position, with direct implications on the Canadian dollar, Ms. Sutton said.
"We could see some weakness in the dollar, but I don't think it's enough to get us back to parity," she said, noting that the loonie is far more susceptible to U.S. dollar movements and global monetary policy.
Meanwhile, equity markets would likely remain immune to the election drama, Mr. Porter said. "The only time in the last 29 years that I can think the equity market was really affected by Canadian politics was during the '95 referendum," he said.
In terms of election campaigns, it hasn't been since 1988, when the debate revolved around free trade, that stock markets responded to political polls, he explained.
This time, markets have been anticipating the status quo -that next week's election will produce another Conservative minority, Ms. Sutton said.
The only real market concern has been around the prospect of a majority result, which could lead to a tighter fiscal approach and upward pressure on the dollar, she said.
That could soon change if NDP popularity persists.
"We could have a result that's very different from what earlier polls were suggesting," Mr. Porter said. "Now there's the possibility that it at least might land on the market's radar in the next week."
While the dollar has yet to take notice of the shifting tides, concern is rising on Bay Street, where the memory of Bob Rae's provincial NDP rule remains fresh, Mr. Macklin said.
The NDP's platform has promised $70-billion in new spending, to be financed by a cap-and-trade system and a hike in the corporate tax rate to 19.5% from 16.5%.
"Canada is otherwise very well positioned right now from the point of view of taxation," Mr. Macklin said. If Mr. Layton's proposed revisions to the tax regime become more likely, markets would not respond favourably.
"Right now, I'd suggest the markets aren't taking it seriously, but if it becomes more of a possibility, we'll see a lot more analysis in that area," he said.
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