Canadian and American stock markets experienced a decline on Friday due to concerns surrounding the impact of the U.S.-Iran conflict on interest rates. Dustin Reid, Mackenzie Investments’ vice president and chief strategist for fixed income, noted that markets were displaying risk-averse behavior in response to elevated energy prices and inflation risks. This shift is reflected in the anticipation of central bank rate hikes, affecting various asset classes, including equities.
The S&P/TSX composite index dropped by 537.57 points to 31,317.41 in Canada, while in New York, the Dow Jones industrial average fell by 443.96 points to 45,577.47. Similarly, the S&P 500 index decreased by 100.01 points to 6,506.48, and the Nasdaq composite saw a decline of 443.08 points to 21,647.61.
Traders have significantly reduced their bets on the possibility of the U.S. Federal Reserve lowering interest rates this year, with some now considering the potential for rate hikes in 2026, a notion previously deemed improbable. While lower rates could stimulate the economy and boost investment prices, they also pose a risk of exacerbating inflation.
The concern over inflation has led investors to believe that central banks worldwide have limited flexibility to cut interest rates further to support their economies. Notably, the Federal Reserve, Bank of Canada, and other major central banks maintained their interest rates unchanged in the past week, signaling a cautious approach in the current economic climate.
The price of the May crude oil contract rose by $2.68 to reach $98.23 per barrel in the market. Brent crude prices have fluctuated significantly, climbing from around $70 per barrel before the conflict to a peak of $119.50 per barrel this week. Market volatility continues as analysts assess the war’s duration and its impact on oil and gas production in the Persian Gulf.
Despite the turmoil, Reid emphasized that historically, stock markets have rebounded swiftly following conflicts, provided that oil prices do not remain elevated for an extended period. In Canada’s stock market, most sectors witnessed negative trends, with basic materials exerting the most significant downward pressure. Consumer non-cyclicals was the sole sector to show positive movement.
The Canadian dollar was trading at 72.90 cents US, slightly higher than the previous day. Reid highlighted the Canadian dollar’s resilience in the face of recent market challenges, attributing its performance to safe-haven flows that have also bolstered the U.S. dollar.
Overall, the market landscape remains uncertain, with ongoing geopolitical tensions and fluctuating energy prices influencing investor sentiment and economic outlooks.
