Vote’s impact on markets seen as modest

Call could push loonie down, bonds up But economic reports may matter more

The financial markets will likely take the death of the Liberal government in stride, but there could be limited pressure on the Canadian dollar.

Tonight’s expected developments have already been factored into the markets, experts say. “ In this specific case, the government losing the confidence vote is widely expected and much commented on. It’s not like it’s going to be a huge surprise,” says Paul Ferley, assistant chief economist at the Bank of Montreal. An election call can create uncertainty and foster negative sentiments in the market. “ Some of that uncertainty has already been factored into the market. A couple of weeks ago we were seeing a bit more pressure on the Canadian dollar and that was being attributed to the speculation of a potential election call.”

If there is any reaction, it will likely be a weakening of the Canadian dollar and in terms of the bond market there may be a bit of upward pressure on yields, Ferley says. “ But I’m assuming it’s going to be fairly limited.”

Investors will be more interested in a number of economic reports out this week, including the latest employment numbers for both Canada and the United States, Ferley added.

Toronto Dominion Bank economist Carl Gomez agrees “ the market is probably already reflecting to some extent the uncertainty of the minority government situation.”

Speculation on whether the government will fall this month has been widely reported in the media Gomez says. “ So I think a lot of that activity or that sentiment has been priced into the market already.”

“ In terms of the overall picture, Canadian elections have not typically been huge market movers in recent years,” CIBC World Markets senior economist and strategist Peter Buchanan wrote in a report.

“ The historical evidence does, however, point to a modest constructive effect, across a range of asset classes. To the extent that is true, investors would be well advised generally to remain invested as opposed to taking defensive steps like raising cash.”

Michael Le, a Canadian fixedincome strategist at JPMorgan, says any impact will likely be seen in the foreign exchange market.

“ If you look at the previous situations where we had these political uncertainties, most of the impact has come on the currency side rather than, for example, the fixed income or the equity side.”