The U.S. and China have upped the ante in their ongoing trade war, as the Trump administration threatened new tariffs on Chinese imports and Beijing retaliated by letting the yuan depreciate, which prompted the U.S. Treasury to label China a currency manipulator.
All this happened in the past six days and has implications for both savers and borrowers in Canada.
The tit-for-tat rattled financial markets, briefly sending stocks plunging and pushing up the price of bonds. On Monday, the S&P 500 — which measures the value of the stocks of the 500 biggest corporations traded on the New York Stock Exchange or Nasdaq Composite — shed three per cent of its value, its biggest loss since the beginning of the year. The Dow Jones Industrial Average and the Nasdaq Composite, the other two major U.S. stock indices, also notched steep losses, landing roughly where they were 12 months ago.
While Canada’s benchmark stock market index, the TSX, was closed for the civic holiday, indices in other countries also fell.
Meanwhile, nervous traders flocked toward safer financial assets, pushing up bond prices as yields moved lower. A low return, or yield, on longer-term bonds typically signals investor concerns about future economic growth.
WATCH: Wall Street recovers after tumble but trade war fears continue to simmer
Financial markets have since recouped some of the lost ground, but investors could be in for more turbulence, according to several commentators.
“Can things get any worse? Oh yes. Yes, they can,” BMO economist Jennifer Lee wrote in her morning note on Tuesday.
In the U.S., the latest spat between Washington and Beijing is rekindling fears that the trade standoff may push the American economy into recession.
“We may well be at the most dangerous financial moment since the 2009 Financial Crisis with current developments between the U.S. and China,” Lawrence Summers, who served as treasury secretary under former President Bill Clinton and as economic advisor to former President Barack Obama, tweeted on Monday.
“Markets are now suggesting the highest risk of recession since 2011. …The collapse in medium- and long-term interest rates is ominous.”
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For Canadians with money in the stock market, the impact is obvious: your portfolio likely took a beating on Monday and you may be wondering what to do next. But the recent gyrations of the market are also likely to affect Canadian mortgage rates.
Here’s what investors and anyone shopping for a mortgage should know.
If you’re a small investor, just sit tight
Seeing the value of your portfolio drop is never pretty, but the standard advice for anyone who is trying to grow their retirement savings is “do nothing,” said Larry Bates, a Bay Street veteran turned investor advocate and author of Beat the Bank: The Canadian Guide to Simply Successful Investing.
If you’re investing for retirement, you’re playing the long game, Bates said. Historically, North American stocks have always climbed higher but are prone to short-term dips.
“If you have a perfect crystal ball, please let me know. Otherwise you must accept that the value of your stock holdings will likely be volatile,” Bates recently told his newsletter subscribers.
That’s because selling when the market is low likely means losing out on at least some of the gains your portfolio would record when stocks bounced back.
READ MORE: Why reacting to market ups and down is never a good idea
“The key is to select the right mix of stocks versus bonds in your portfolio and to adjust that mix over time as your circumstances, goals, time frames and ability to handle risk change,” Bates wrote. (While stocks hold the promise of higher returns, bonds tend to be less prone to ups and downs.)
The same advice holds even if stock market downturns happen just as you’re about to retire, according to Bates. It probably makes sense to increase your share of bonds as you get older to reduce your portfolio’s volatility and the chance of a significant value drop just when you have to start withdrawing from your investments, he added.
However, he added, “you’re not turning into a pumpkin when you retire, hopefully you’re going to be living for decades to come.”
In other words, even retirees and soon-to-be retirees can ride out short-term bumps.
And as far as those hiccups go, Monday’s drop of around three per cent was a pretty minor one, Bates said. A stock market correction can easily wipe out 10 to 15 per cent of your stock portfolio’s value — a recession could erase 25 per cent of it.
Even after Monday’s drop, the stock market is still up about 12 per cent since the beginning of the year, he said.
Besides, there’s a silver lining to cheaper stocks. If you’ve set up fixed monthly contributions to buy up investments according to your desired stock-bonds split, you’ll find that “your buck goes further,” Bates said.
WATCH: How will robo advisers fare in the next recession?
Mortgage rates likely to stay low
The U.S.-China brouhaha also matters for the Canadian mortgage market.
Stateside, worries that the escalating trade war will hurt the economy are dragging down long-term bond interest rates, a sign that investors expect growth to slow down and short-term interest rates to fall. This is also putting downward pressure on Canadian long-term bond rates, which, in turn, affect fixed mortgage rates.
READ MORE: With fixed rates below variable ones, mortgage market is in the Upside Down
Canadian variable mortgage rates, on the other hand, tend to follow the short-term interest rate set by the Bank of Canada, which has given no sign of wanting to cut rates, a move that lowers borrowing costs and helps stimulate growth.
The result has been longer-term interest rates dipping below short-term rates — and fixed mortgage rates falling below variable rates. For example, Canadians can now get a lower interest rate on a five-year mortgage by locking into a fixed rate rather than choosing a variable one.
That’s a historical anomaly. Normally, homeowners who take on the risk of a variable mortgage rate enjoy a rate discount of between half and a full percentage point, said David Larock of Integrated Mortgage Planners.
This is happening because the Bank of Canada and the U.S. central bank, the Federal Reserve, “don’t agree with the bond market,” Larock said.
Both central banks haven’t been nearly as pessimistic about the future of the economy as bond investors, he added. Even while the Fed lowered interest rates in July, it signalled the move would not start a cycle of rate cuts.
WATCH: How an interest rate cut in the U.S. affects Canadian mortgage rates
The events of the past few days, though, have arguably darkened the economic outlook for the U.S., putting pressure on America’s central bank to keep on cutting to sustain growth.
“The longer the U.S.-China trade war lasts, the more its negative impacts will intensify,” Larock wrote in a recent blog post. That would be especially the case if the Trump administration carried out its threat to imposed fresh tariffs on Chinese imports starting Sept. 1.
Other Fed-watchers share that sentiment. The events of the past few days, for example, prompted BMO economists to revise their forecast, which now predicts two consecutive interest rate cuts in September and October.
Meanwhile, north of the border, things are still looking up for the Canadian economy, which makes it unlikely the BoC is going to its benchmark interest rate — at least until Canada starts to feel a bit more pain from the U.S.’s economic woes, according to Larock.
The impact on mortgages?
“Over the next few months, I think fixed rates will stay the same or fall. And I think ultimately variable rates will come down,” Larock said.
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