Canadian and American stock markets experienced declines on Friday due to concerns surrounding the 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-averse behavior amidst rising energy costs and inflationary pressures. This shift was leading to expectations of potential central bank interest rate hikes, affecting various asset classes, including equities.
The S&P/TSX composite index dropped by 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. Additionally, the S&P 500 index was down by 100.01 points at 6,506.48, and the Nasdaq composite decreased by 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 in the current year, with some even contemplating a rate hike in 2026, a scenario previously deemed improbable. While lower interest rates could stimulate economic growth and asset prices, there are concerns that they could exacerbate inflation. This has led investors to perceive limited room for global central banks, including the Federal Reserve and Bank of Canada, to implement interest rate cuts to support their economies.
The May crude oil contract saw an increase of $2.68 US, reaching $98.23 US per barrel. The price of Brent crude oil has fluctuated from approximately $70 US per barrel before the conflict to as high as $119.50 US this week, with market volatility reflecting uncertainties about the war’s duration and its impact on oil and gas production in the Persian Gulf.
Stock markets have a track record of rebounding swiftly following past conflicts, provided that elevated oil prices are not prolonged. In the Canadian stock market, most sectors experienced negative performance, with basic materials being the main drag, while consumer non-cyclicals were the sole sector in positive territory. The Canadian dollar traded at 72.90 cents US, slightly higher than the previous day, showcasing resilience amidst safe-haven flows favoring the U.S. dollar.
Overall, market participants are closely monitoring developments in the geopolitical landscape and their implications on economic indicators and asset valuations.
