Canadian and American 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 strategist for fixed income at Mackenzie Investments, noted that markets were responding with risk-averse actions amid rising energy prices and inflation risks. This shift in sentiment has led to expectations of potential 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. Additionally, 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 interest rate cuts by the U.S. Federal Reserve this year, with some now considering the potential for rate increases in 2026, a scenario previously deemed unlikely. Lower interest rates, which were previously anticipated, could have stimulated the economy and investment values, a demand that U.S. President Donald Trump had been vocal about. However, the current trend suggests that lower rates might exacerbate inflation, leaving limited options for global central banks to utilize rate cuts to support their economies.
The price of the May crude oil contract rose by $2.68 US to $98.23 US per barrel. Concerns about the duration and impact of the U.S.-Israel conflict on oil and gas production in the Persian Gulf have led to significant fluctuations in Brent crude prices, escalating from around $70 US per barrel prior to the conflict to as high as $119.50 US this week. If Brent crude remains at $120 US per barrel for an extended period, the focus may shift from inflation concerns to considerations about global growth and corporate earnings.
Despite the market downturn, history shows that stock markets have the potential to rebound swiftly following conflicts, provided that oil prices do not remain elevated for an extended period. In the Canadian stock market, most sectors experienced losses, with basic materials weighing the heaviest, while consumer non-cyclicals was the sole sector showing positive movement.
The Canadian dollar traded at 72.90 cents US, slightly up from 72.84 cents US on the previous day. Reid mentioned that the Canadian dollar has performed relatively well in recent weeks, aligning with the strength of the U.S. dollar, which has attracted significant safe-haven investments.