Research and Market Commentary

COVID-19 continues to weigh on global markets

April 3, 2020

The COVID-19 outbreak continues to spread across the globe, prompting new or extended shutdown and quarantine orders to reduce transmission and slowing economic activity to a near-halt as a result.


As policymakers continue to take steps to battle the pandemic and dampen its impact, the ramifications for wide swaths of the Canadian and global economies are profound and ever-changing.


We asked Scotiabank analysts to weigh in on what COVID-19 means for equities, currency and retail at this stage in the cycle.


Global Equities

  • While the “sell everything” phase is over, we’re not sure the “all clear” sign is here either. We believe these three recurring headlines could keep the pressure on equities for the coming weeks:


  1. Swift rise in number of US COVID-19 cases
  2. US/European macro data missing expectations
  3. Corporate guidance dropped or pushing estimates lower


  • Fiscal and monetary policy to the rescue: On the positive side, investors should not underestimate the current round of fiscal and monetary easing – it’s unprecedented.


  • Upgrading Size and Quality: Looking ahead, the short-term environment will likely remain challenging, with low visibility, elevated volatility, low/falling bond yields and choppy equity markets. A re-test of the lows should not be ruled out. Hence, adding cash and selectively upgrading size/quality in portfolios still make sense, in our opinion.


  • Required signs to switch to a more aggressive portfolio posturing: A recovery in long-term bond yields and copper price could provide a good indication that the worst is behind and risk-appetite is returning. Moreover, the 2nd derivative in COVID-19 cases is also a good yardstick. Finally, high frequency data should help signal the turning point as well.


  • Asset Mix Model: Historical shift this month as equities’ recommended weight falls by 17.5% to underweight. Government bonds are upgraded to overweight with spiking spreads in the high-yield and investment-grade space accounting for most of the shift. Our Panic-Euphoria indicator hit extreme Panic levels in March, resulting in the highest cash over equity signal since 2016.


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


Foreign Exchange

  • The CAD has settled into a broad and choppy range against the USD for now.  We expect this situation will extend deeper into Q2 at this point. The CAD remains depressed by weak crude oil prices while we think the broader appeal of the USD will be curbed by the Fed’s aggressive liquidity provisioning and quantitative easing policies.  The Bank of Canada made the first of its asset purchases this week, buying CAD1 billion in securities in the 5-year sector of the curve.  Meanwhile, data from the Fed show that its balance sheet rose by around USD 1 trillion through March alone.


  • While global stock markets have stabilized over the past week, helping reduce volatility in other markets, we expect the broader market mood will be shaped by developments on the COVID-19 front in the next few weeks. Some European countries appear to have arrested the spread of the virus – but are choosing to extend their lockdowns through April, meaning a longer economic hiatus. President Trump’s comments appeared to be aimed at steeling the US for a worsening in the domestic situation. Developments may undermine risk appetite and boost FX volatility again in the coming weeks.


  • Investors should be aware that market conditions remain difficult; liquidity has appeared patchy in the CAD at times this week, resulting in some large intraday swings in the currency for no obvious reason.  


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



  • As we enter a new month under COVID-19 restrictions and disruptions, consumers and retailers are reconciling themselves to what looks to be a more prolonged period of disruption. At the same time, all are trying to determine the likely longer-term impacts on how people shop, work, and live.


  • Grocers have taken centre stage in the COVID-19 crisis, stepping up and showing tremendous leadership in ensuring consumers have access to essential items. They have been making swift decisions and adapting as conditions change. Front-line grocery workers are being hailed as the nation’s heroes along with healthcare workers. March was a peak month for grocers with sales levels never seen before. The UK supermarket sector saw March sales up 21%, while US-based Kroger, the nation’s largest supermarket chain, revealed March sales rose 30%. The Canadian chains will have witnessed similar trends. Towards the end of March, sales remain abnormally high but have come down from the peaks as consumers now limit shopping trips. Canadian grocers are having tremendous difficulty keeping up with the rise in demand for home delivery and click-and-collect. Before COVID-19, many were promising same-day delivery and two-hour windows. Today customers are having to wait one or two weeks and are seeing exceptionally high levels of substitution or no-shows on some items.


  • The Trudeau government wage relief package has delivered welcome news to those retailers and foodservice companies whose stores have either been shuttered or are otherwise facing serious revenue declines. Any company that experienced a revenue decline of 30% or more in y/y in March will be entitled to wage relief of 75% up to a maximum of $58,700 — so $1,129 a week in pre-crisis earnings would generate the maximum subsidy of $847 a week. It will be in place for three months and is available to all businesses independent of size or number of employees.


  • Across the country, retailers are doing what they can to conserve cash and shore up liquidity. However, in the context of substantial declines in sales, which we estimate in many cases would exceed 70%, many are vulnerable to bankruptcy. 2019 was a record year for retail store closures in North America. There is a chance with COVID-19 that 2020 could top that record. In so many ways, the consumer and the retail landscape will be changed.

— Patricia Baker, Director, Retailing, Global Equity Research



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