Research and Market Commentary

Global markets insights: Eyeing the post COVID-19 landscape

April 30, 2020

As Canadians enter a new month of physical distancing and settle into a new normal, several provinces have begun laying the groundwork for restarting their economies. Hopes are high for when economic activity returns, but it remains to be seen how COVID-19 has shifted the ways in which people work, live and interact with others, and businesses.


We asked Scotiabank analysts to weigh in on what the latest pandemic developments mean for retail, currencies and equities right now.



  • As May nears, Canadians remain in self isolation and have become more acclimatized to the “new normal" that is work from home. Most retailers across the country remain shuttered and many are struggling to determine how they will emerge from the COVID-19 lockdown and a fair few are harbouring major concerns as to whether they will be able to survive this disruption. Reports suggest that only 20% to 25% of tenants in Canada's enclosed malls paid their April rents. There will very likely be a serious fallout.


  • The large question most retailers are grappling with now is to what extent to consumer behaviours and habits shift as result of the COVID-19 pandemic and how these shifts will impact shopping behaviour. How long will it take consumers to feel safe gathering in large spaces like shopping malls? Will consumers be willing to use apparel dressing rooms, or will they revert to trying on items in the perceived safety of their own homes? At what point do consumers regain comfort with touching and checking a table of stacked sweaters or jeans that likely will have been handled by other customers? The industry may be forced to adopt very differing operating models to support the changed consumer. Selling online is one solution but there are rather large fleets of bricks and mortar to support. In the absence of a vaccine, it is hard to imagine a return of the old ways of shopping at stores for apparel and footwear anytime soon. With the provinces of Saskatchewan and Quebec loosening retail restrictions in May we will see get a live view on consumer reluctance soon.


  • One area where we see the likelihood of a prolonged shift in behaviour is food at home. We expect food at home sales to remain elevated even when we emerge from lockdown. We anticipate a prolonged reluctance by Canadians to return to away-from-home eating. The newly formed social distancing habits and avoidance of large gatherings of people will likely persist. A recent survey of consumer intentions by Technomics on how long it will take to return to eating away from home showed that 76% of Canadians surveyed indicated it would be longer than one month, 24% indicated three months, and 21% said it would take longer than six months. Additionally, an anticipated severe economic slowdown related not only to COVID-19 but also to the massive downturn in the oil and gas sector will curb discretionary spending, including restaurant spend. These will see grocery spend in the country move higher. Another major shift that has been evident is more and more families are making meals from scratch, and many may have discovered a fondness for cooking. The national shortage of flour and yeast points to a rise in baking activity. There is likely to be some stickiness of these new habits once we emerge from COVID-19. We believe it is highly likely we will see elevated sales for grocers through 2020, not at the 25% level evident in Metro Inc.’s start to Q3, but certainly beyond normal levels.


—  Patricia Baker, Director, Retailing, Global Equity Research


Global Equities

  • Solid results from some big US tech companies as well as “encouraging” results in a drug trial against the COVID-19 further boosted investors’ optimism. The TSX (2.9%) and S&P 500 (2.6%) scored solid gains on April 29, brushing off a steeper-than-expected contraction in US Q1 GDP (-4.8% annualized). Since its March 23 low (2,237 – closing basis), the S&P 500 has recovered 31%. Until recently, the equity rally was mostly defensive in nature, with some of the lowest beta sectors leading the charge. In our opinion, the defensive leadership was suggesting concerns among investors regarding the sustainability of the equity bounce, with a strong proportion expecting a double-dip.


  • However, we have started to notice some changes in investors’ risk-appetite in the last few days. A ratio of high beta stocks (SPHB ETF) to low volatility stocks (SPLV), which was unable to rise despite the rally, has started to accelerate. Small caps stocks have also started to regain some altitude relative to large caps. We have been advocating for a pause in the equity rally of late (and we still think we’re due for a rest), but a sustained rotation toward laggards could potentially provide further legs to the rally.


  • The Fed pledged again on April 29 to maintain rates near zero until it "is confident that the economy … is on track to achieve its maximum employment and price stability goals," which is probably far down the road. To get confirmation the equity rally remains on solid ground, we would keep an eye on the LQD to IEF ratio, which is tracking investment grade bonds over Treasuries. As long as the ratio goes up, investment grade spreads tighten, and the advance in stock prices is likely to extend. A reversal would be a bad omen.


—  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

  • Currencies have taken their cue from the broad risk mood in markets through April as fundamental drivers take a back seat with rock-bottom rates across the major economies erasing the influence of yield differentials. The recent collapse in front-month oil futures contracts has also had a limited impact on commodity currencies, such as the CAD and the MXN, as markets anticipate that oversupply will merely be a temporary issue as production cuts begin and the glut in crude inventories unwinds. 


  • The hope of an economic “reopening” over the coming weeks and aggressive monetary stimulus by the world’s key central banks has acted to improve risk sentiment and lift most major currencies against the USD its March peak. The greenback nevertheless remains well supported owing to elevated uncertainty over the speed of economic adjustment, with high-frequency data pointing to a sharp impact of the COVID-19 economic shutdown—and a long-lasting slump in output beyond the lockdown period. Over 30 million Americans—about 20% of the labour force—have applied for unemployment benefits since mid-March. In Canada, close to 7.5 million people—over 35% of the labour force—have applied for the government’s C$2,000/month emergency response benefit.

  • Despite a near-term economic collapse where the US, Canada, and the Eurozone are expected to contract in the ballpark of 40 to 50% in annualised terms in Q2, markets are betting on a rebound in economic activity in the second half of 2020 that should take the haven shine off the USD—in addition to a flood of dollar liquidity due to the Fed’s aggressive pace of asset purchases and its swap lines with other major central banks.


  • The threat of a second wave of COVID-19 contagions that could force another quarantine period, a bumpy post-lockdown recovery, and still-depressed crude oil prices means that markets will maintain a cautious view on the Canadian dollar. We expect that USDCAD will have trouble in firmly detaching from the 1.40 mark while remaining in a broad channel between 1.3750 and 1.45 in the short-to-medium term.


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



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