Canadian and U.S. stock markets experienced a decline on Friday due to concerns regarding the impact of the U.S.-Iran conflict on interest rates. Dustin Reid, the Vice President and Chief Fixed Income Strategist at Mackenzie Investments, noted that markets were reacting with risk-averse behavior in response to rising energy prices and inflation risks. This has led to a shift in expectations towards potential central bank interest rate hikes, impacting various asset classes, including equities.
The S&P/TSX composite index dropped 537.57 points to 31,317.41, 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 cutting interest rates this year, with some now even considering a scenario where rates might be raised in 2026. Lower interest rates, which President Donald Trump had been advocating for, could stimulate the economy and investment prices but also pose risks of exacerbating inflation.
Amid concerns about inflation, investors are recognizing limited room for global central banks, including the Federal Reserve and Bank of Canada, to further reduce interest rates. This sentiment was reflected in the decisions of central banks in Europe, Japan, and the United Kingdom to maintain their interest rates unchanged during the previous week.
The price of the May crude oil contract rose by $2.68 US to $98.23 US per barrel. The fluctuating price of Brent crude, which surged from around $70 US per barrel pre-conflict to highs of $119.50 US, has been causing significant volatility as financial markets assess the duration and impact of the war on oil and gas production in the Persian Gulf.
Stock markets historically rebound swiftly from past geopolitical conflicts, including those in the Middle East, provided that oil prices do not remain elevated for prolonged periods. In the Canadian stock market, most sectors experienced negative performance, with basic materials exerting the most significant downward pressure. The consumer non-cyclicals sector was the sole sector showing positive movement.
The Canadian dollar was trading at 72.90 cents US, slightly up from 72.84 cents US the previous day. Reid mentioned that the Canadian dollar has performed relatively well in recent weeks, aligning closely with the U.S. dollar’s safe-haven appeal during uncertain times.
