Canadian and U.S. stock markets experienced declines on Friday due to concerns regarding the potential impact of the U.S.-Iran conflict on interest rates. Dustin Reid, who serves as the vice-president and chief strategist for fixed income at Mackenzie Investments, noted that markets were responding with risk-off moves in light of elevated energy prices and inflationary risks. This situation has led to expectations of central bank rate hikes, affecting various asset classes, including equities.
The S&P/TSX composite index dropped by 537.57 points to reach 31,317.41 in Canada, while in New York, the Dow Jones industrial average fell by 443.96 points to 45,577.47. The S&P 500 index and Nasdaq composite also experienced declines, with drops of 100.01 points to 6,506.48 and 443.08 points to 21,647.61, respectively.
Traders have significantly reduced their bets on the possibility of the U.S. Federal Reserve cutting interest rates this year, as indicated by data from CME Group. Some now anticipate the Fed potentially raising rates in 2026, a scenario previously deemed unlikely before the conflict arose. While lower interest rates could stimulate the economy and bolster investment prices, they may also exacerbate inflation concerns.
The recent stability in interest rates maintained by central banks globally, including the Federal Reserve and Bank of Canada, reflects the limited room for further rate cuts to support economic growth. Major central banks in Europe, Japan, and the United Kingdom also held their interest rates steady in the past week. Additionally, the May crude oil contract increased by $2.68 US to $98.23 US per barrel.
The fluctuating price of Brent crude, which surged from around $70 US per barrel before the conflict to as high as $119.50 US this week, has caused significant uncertainty in financial markets. Market participants are closely monitoring the duration of the conflict and its potential impact on oil and gas production in the Persian Gulf. Reid suggested that sustained high prices could shift focus from inflation concerns to considerations about global growth and corporate earnings.
Despite the market volatility, past trends show that stock markets tend to recover swiftly following conflicts, provided that oil prices do not remain elevated for an extended period. In the Canadian stock market, most sectors recorded losses, with basic materials weighing the most heavily. Consumer non-cyclicals was the sole sector to register gains.
The Canadian dollar traded at 72.90 cents US compared to 72.84 cents US the previous day, outperforming expectations amid safe-haven flows. Reid highlighted the Canadian dollar’s resilience in recent weeks, aligning closely with the strength of the U.S. dollar amidst heightened market uncertainties.