Fear has finally taken a breather in Canada after ravaging markets relentlessly for the past month.
A week-long rally in domestic stocks, the currency and crude oil has clawed back some of the vast losses levied this year by the global equity sell-off and the crash in commodity prices.
Canadian markets may have reached the point of maximum pessimism, and barring a global recession there is a glimmer of hope for battered domestic stocks, said Greg Taylor, a fund manager at Aurion Capital Management.
"I think the pendulum swung too far," he said. "The sentiment on Canada just got to the extremes of bearishness."
The S&P/TSX composite index has jumped by nearly 10 per cent from its intraday low on Wednesday of last week. At that time the benchmark had slumped to 26 per cent below its peak last year, and was back to levels seen 3 1/2 years ago.
Not coincidentally, the composite's companions in descent over the past several months – crude oil and the Canadian dollar – have rallied sharply over the same time.
Over the past seven trading days, the loonie added nearly 4 cents from trough to peak, bringing the exchange rate to within a penny of last year's closing value. Meanwhile, West Texas intermediate crude soared by as much as 33 per cent in that time to approach $35 (U.S.) a barrel on Thursday.
The Canadian economy's diagnosis hasn't improved much, however, having just begun to process the full extent of the resource shock. But the recent "overdosing of pessimism" in excess of economic pressures could mean the worst is priced into equities, Avery Shenfeld, chief economist at CIBC World Markets, said in a report.
"Canada will be sluggish as noted, but risk assets could at least stabilize if views on the rest of the world don't look as ugly as we move through the year," he said.
The pace of deterioration in the global resource space this year forced CIBC to cut its forecast for Canadian growth on Thursday, just one month after setting its outlook for the year.
"These are unusual times," said Mr. Shenfeld, one of the report's authors. "While the country's GDP is less heavily weighted to resource-sector spending than it was a year ago, we're only in the early stages of the negative spillover effects on other sectors."
The revised outlook for real GDP growth in 2016 is an "anemic" 1.3 per cent, and even that includes the assumption of increased fiscal stimulus.
The commodities to which Canadian fortunes are so correlated remain in great oversupply, suppressing prices for all kinds of resources. But supply pressures are starting to alleviate those conditions in some markets, and "modest price recoveries should be in the cards as the market eyes brighter days in 2017," the CIBC report said.
On the demand side for commodities, growth in certain emerging-market economies should help offset China's slowdown, contributing to an improving global economy this year and next, the authors wrote, adding, "Commodity markets often overshoot, and looking beyond the very near term there are good reasons to dip a toe back in the water."
The outlook for the Canadian dollar is also starting to tilt to the upside.
"We believe that we have hit the trough in the Canadian dollar and expect a gradual but potentially slow recovery," James Orlando, an economist at TD Economics, said in a note.
The currency's revival will be limited by Canada's economic pressures, as well as divergence between Canadian and U.S. monetary policy, he said.
The nascent rebound of Canadian stocks, meanwhile, will be tested by fourth-quarter earnings season, which hits full swing in mid-February.
Companies in the S&P/TSX composite index are expected to realize a profit increase of 2.1 per cent over the same quarter in 2014, according to a National Bank of Canada report. Excluding the materials and energy sector, the expected earnings growth rises to 7.2 per cent.
"This report shows that all is not bleak," said Matthieu Arseneau, senior economist at National Bank. "Let's hope that Canadian corporations surprise on the upside for supporting further gains."