Jefferies bullish on Canadian stocks as Canada cuts bond purchases

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The Bank of Canada has said it will tighten the taps on economic recovery.

(Susan Mcarthur Letellier / Dreamstime)

The Bank of Canada on Wednesday became the first major central bank to cut asset purchases that began during the Covid-19 pandemic. The central bank has announced that it will reduce its weekly net purchases of government bonds from C $ 4 billion to C $ 3 billion.

After the bank’s decision to tighten the taps on the economic stimulus, the Canadian dollar strengthened 0.9% against the US dollar – its biggest gain in 10 months – and the leading S&P composite index / TSX ended the day up 0.5%.

The move and a number of key economic and market factors prompted strategists led by Sean Darby of investment bank Jefferies to raise their rating on Canadian stocks to “slightly bullish.”

Also read:Canadian chipmaker Alphawave chooses London for IPO. Here is what you need to know.

Strategists said it was “unusual” for the Bank of Canada to have the US Federal Reserve at the forefront. The move comes as Canada grapples with a crushing and deadly third wave of Covid-19 infections, the country’s largest province, Ontario, extending and widening a current lockdown as the country’s vaccination program lags behind the United States. March was slightly lower than expected at 2.2%, but remains the highest since February 2020.

Nonetheless, “the expanding US economy, firming demand for industrial products, stable energy prices and a resurgence in free cash flow from the stock market” helped Canadian equities upgrade, said. declared the strategists.

Jefferies’ team said that the stock exchanges in Canada and Mexico both tend to be highly correlated with the

S&P 500

when the US economy is expanding, Canadian indices in particular

Industrial S&P 500.

Canada’s economy is resource-dependent and strongly linked to the energy industry, as the country is one of the largest exporters of oil and natural gas. That means Canadian stocks will be helped by high industrial spot prices, strategists said, as well as stable energy prices – and benchmark Brent is holding at pre-pandemic levels.

More:Canada’s central bank keeps its key rate at 0.25%

The strength of the US economy has more than boosted Canadian stocks, strategists said, pointing to a labor market, manufacturing sector and trade balance that have benefited from a wealthy neighbor. Canada’s 7.5% unemployment rate is less than half of the peak of the pandemic, while the PMI in manufacturing is above pre-pandemic levels and the trade balance is the highest since 2014.

Additionally, “the stock market’s free cash flow has reversed sharply over the past six months, leaving the stock market looking to be pretty good value for money relative to government bonds, although not. cheap in a historical context, ”the strategists said.

In addition to announcing the reduction in bond purchases, the central bank on Wednesday hinted at a hawkish stance on interest rates and indicated that its first rate cut could come in 2022. The Bank of Canada also reviewed upward its forecast for real gross domestic product growth in 2021 to 6.5%, before growth slows to 3.75% in 2022 and 3.25% in 2023.

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