Research and Market Commentary

Global markets insights: Depth of COVID impact sinks in

April 17, 2020

Canada saw a massive contraction in its economy in the first quarter as the full economic impact of the global pandemic begins to be felt. The second quarter looks to be even worse, even as governments step up measures to provide relief to businesses and consumers.


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



  • The OPEC+ price war is over; oil will recover: Russia and Saudi Arabia are oil market allies once again and OPEC+ will be cutting supply from the market starting May 1st. The group has committed to a 10 million bbld supply cut, which will be slowly phased out over a two-year period. As a result, longer-term fundamentals are meaningfully more constructive, which should boost oil prices as demand recovers.

  • Timing is still a major issue: Storage tank tops may still pose a threat to the immediate near-term oil prices. OPEC+ supply cuts do not occur until May 1st and there is an inherent delay between when those cuts occur and when they are observed physically in the market due to shipping timelines. Furthermore, COVID-19 lockdown measures are still in effect, which continue to devastate daily refined products demand. While there are efforts to restart the global economy, we fear that the timing of when supply cuts are observed and when demand recovers is simply too late; storage will fill to dangerously high levels.

  • Non-OPEC capex reductions and supply curtailments: While not a participant of OPEC+, more private-sector E&Ps (exploration and production companies) are self-electing to reduce drilling activity and even cut daily production given the poor economics of current market prices. As a result, global and local supply-demand balances should further improve, supporting market prices longer-term.

  • Natural gas not a safe-haven this summer: Storage concerns for natural gas markets will also play a role during this summer injection season. Supply declines resulting from market forces are occurring but, once again, timing presents a problem. The summer injection season will see supply declining from an already too high level and amid normally weak summer demand, which may be even weaker due to lower industrial sector activity and poor LNG export market economics. However, the fundamentals into the approaching winter are convincingly stronger as these supply declines continue.


—  Michael Loewen, Director, Commodities Strategist, Global Equity Research



Foreign Exchange

  • Incoming data are starting to reveal the depth of the economic contraction in the US and Canada resulting from the COVID-19 lockdown. Preliminary data from Statscan for Q1 suggest the Canadian economy may have contracted around 10% in Q1 on an annualized basis – the steepest ever drop – meaning Q2 is likely to be much worse. Meanwhile, US weekly jobless claims data showed 22 million people have filed for unemployment benefits in the past four weeks, effectively erasing all of the jobs created in the US recovery following the financial crisis. Central banks are responding to the evolving situation. The Fed has reduced some of its repo operations as market liquidity conditions improve. The Bank of Canada tweaked its asset purchase program to include provincial and corporate debt.


  • Currency markets remain choppy and volatile and discerning “noise” from “signal” in day-to-day trading remains difficult, as is attributing any sort of fundamental value to currencies. The CAD has softened over the past week, but only modestly despite the renewed weakness in crude oil prices following the failure of the OPEC+ production cuts to lift pricing. The USD remains well supported overall but we expect Fed liquidity and quantitative easing measures to weigh on the USD in the medium to longer term. 


  • Signs that the spread of the coronavirus may be slowing is likely to lift market hopes that social distancing restrictions can be eased and the process of “normalization” can start. This should be positive for the likes of the CAD and the AUD, and may undercut support for the USD somewhat. We expect broad and choppy range trading to persist in the next few weeks, with the USD likely to remain within a range bound by 1.3750 on the downside and 1.45 on the topside. 


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


Global Equities

  • All eyes on earnings: The upcoming reporting season will reveal COVID-19 impacts on businesses and allow companies to offer some guidance on upcoming quarters as well as review dividend policy. Actual results are likely to be lower than stale sell-side consensus and could induce more negative revisions to H2/20 forecasts.


  • Investors should look beyond 2020 - updating our earnings scenarios: Despite the economic hardship, the shock should hopefully be relatively short-lived. Given the unprecedented fiscal and monetary response, profitability could recover relatively sharply in 2021, with peak earnings potentially back in 2022, in our view. To provide some perspective, we expect S&P 500 EPS to contract 25% in 2020, followed by a steep recovery in both 2021 (+26%) and 2022 (+14%). TSX earnings will suffer more than their US counterparts this year (-30%) due to higher cyclicality. However, we expect a stronger rebound in 2021 (+48%) and 2022 (+19%).


  • US equity bounce running low on fuel, TSX has room to rally further: The equity bounce since late March has been very impressive, with stocks rallying on COVID-19 infection rates flattening and investors pricing out depression-like scenarios. Still, the macro and earnings news flow will remain negative for some time and it could induce near-term choppiness. In addition, the S&P 500 is already hovering near our revised target price (2,850, 18.5x 2021 EPS). Meanwhile, our more conservative TSX target of 16,000 (14.8x 2021 EPS) still implies double-digit gain potential for the Canadian benchmark.


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



  • The toll that the COVID-19 pandemic has taken on the retail industry was revealed in the release on Wednesday of US retail sales figures for the month of March. Overall retail sales fell 8.7%, which marked the biggest monthly dip since the government started tracking the data in 1992. March saw many stores shuttered under government orders while at the same time layoffs started to crimp consumer spend. Grocery sales were the bright spot, rising 27% in March. With most people now under lockdown and eating three meals a day at home, this is not surprising. Health and personal care stores saw sales up 4.3%. On the downside, three categories stand out: Clothing sales declined 50%; the furniture/home furnishings category dropped 24.6%; and food services/drinking places posted a 23% decline. Given that for the first half of March many now-shuttered stores were still open, we could see even worse trends in April.


  • While everyone is well aware of the impact of the pandemic on the surging top line for grocers, there hasn't been the same level of recognition of the added cost burden being borne by supermarkets as they flex operating models to cope with the challenge of operating in the crisis context. Recent updates from Tesco in the UK and Sobeys here in Canada highlighted incremental areas of investment. Grocers are not only adding labour to meet the surge in demand but have adopted various forms of “hero” pay in augmenting the pay packet of frontline workers. Increased security and heightened sanitation procedures at stores are added costs. Implementing social distancing protocols, adding resources for cashiers, installation of plexiglass shields and distribution of PPE among other store-level changes are also adding to selling costs. In the near term, higher sales are likely to offset higher costs, but it remains to be seen how much of the incremental cost will be more ongoing.


  • One challenge retailers are going to face over the coming months stems from government efforts to help those who have lost their jobs in the wake of the pandemic. Here in Canada the CERB program provides a $2,000-a-month payment for four months. For many in the service sector that is more (or close to) what they were making on the job. This means if we emerge from the pandemic in that time period, retailers may face difficulty enticing some to come back to work. The industry will need to be creative in trying to attract workers.


  • Another likely challenge may arise in the food supply chain as we approach spring harvest. Farms have relied in the past on migrant workers to pick crops. With all the restrictions on travel and enforced quarantine for anyone entering the country, we could see a shortage of such important labour. Ensuring the safety of those who do choose to do this work will likely require investment in better facilities. All of this could point to higher costs which in turn could lead to inflation for fresh produce this summer.


—  Patricia Baker, Director, Retailing, Global Equity Research



  • Recent focus has centered on precious metals, as the sector continues to outperform led by gold grinding new cyclical highs every few weeks. After some hefty margin-related selling in March, gold has found its post-crisis floor (like it did in post-Lehman) at $1,450/oz, with arguably a more bullish macroeconomic backdrop versus its 2009-2012 run. Prices are abiding by the playbook: it gets taken out with the deflation knock alongside most assets (including havens) into a crisis, but then reacts to massive inflationary stimulus. Current monetary and fiscal policy has started both earlier and ramped up faster than in the past, with additional bullish tailwinds for 2020 stemming from low/negative growth, lower real yields, and unprecedented structural themes emerging faster than many believed (e.g.: unlimited Fed quantitative easing including the purchases of junk bonds, unlimited deficits and direct monetization, uncertainty and wider economic tail risks).


  • USD or Gold: There have been some short-term headwinds the lack of persistent central bank buying, physical-related dishoarding and dislocations impacting liquidity which is holding gold back from $1,800, for now. Overall, gold at $1,800 is likely sooner rather than later with record highs a growing risk; the other shoe to drop will be any convincing US$ weakness on policy divergence between the Fed (and other major economies) it’s a struggle between USD and gold.


Copper’s fundamental floors are in and prices should remain range bound on a U-shaped recovery in 2020.  With demand down ~6% in 2020 driving its balance back into a surplus, national lockdowns in Latin America have resulted in ~2% of annual production losses; that will ensure surpluses don’t run away. Any near-term upside risk hinges on a macro catalyst – infrastructure spending by US or China which has largely been absent, or V-shaped growth rebound, a weaker USD or convincingly higher energy prices.

Nicky Shiels, Director Commodities Strategist, Scotiabank Commodities U.S.


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