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Too Negative

Meanwhile Canada’s economy probably contracted 1.4 per cent in the second quarter, the most since 2009, its trade deficit widened to a record, while the country’s job market shrank last month.

“These markets improving may be an indication that too high probabilities are assigned to negative scenarios,” said Paul Ferley, an assistant chief economist at Royal Bank of Canada in Toronto, the country’s largest bank.

In his view, Canada’s economy is holding up well and will recover in the second half of the year after a temporary dip in the second quarter, driven partly by shutdowns of oil production after wildfires in Alberta.

Oil Prices

Yet skepticism remains over the stability of the recovery as the surge in Canadian assets this year could be just a reversion to the mean after a dismal 2015, when both the currency and stocks fell the most since 2008, according to David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc.

“This year’s stellar performance has to be viewed in the context of the depressed conditions that Canada endured not just last year, but in the last couple of years,” Rosenberg said. “At the same time, more fundamentally, sentiment on Canada, whether it’s the currency, credit or the stock market, is going to be hitched largely to the direction of oil prices.”

Most of the gains in Canada’s equity market came on the back of stocks that are benefiting from almost 30 per cent gains in gold and crude this year, factors the local economy has little influence over. “If you strip out energy and materials, it is a less robust picture,” Rosenberg said, adding he expects the market to finish the year close to levels where it is now.