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, the Vice President and Chief Strategist for fixed income at Mackenzie Investments, noted that markets were reacting with caution to higher energy prices and inflationary pressures. This sentiment has led to expectations of potential central bank rate hikes, impacting 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. The S&P 500 index decreased by 100.01 points to 6,506.48, and the Nasdaq composite declined 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 this year, with some even considering a rate hike in 2026, a scenario previously deemed unlikely before the conflict. Lower interest rates are typically viewed favorably for the economy and investment prices, a stance that President Donald Trump had advocated for. However, the risk of exacerbating inflation looms large, limiting central banks’ ability to implement rate cuts to stimulate economic growth.
Concerns over inflation and the limited room for rate cuts have resulted in stable interest rates from major central banks such as the Federal Reserve, Bank of Canada, European Central Bank, Bank of Japan, and Bank of England. The May crude oil contract surged by $2.68 to $98.23 per barrel.
The price of Brent crude oil has fluctuated significantly from around $70 per barrel before the conflict to a peak of $119.50 per barrel this week. Volatility in oil prices reflects uncertainties surrounding the duration of the conflict and its impact on oil and gas production in the Persian Gulf region.
Despite market fluctuations, history shows that stock markets tend to rebound swiftly post-conflicts, provided that oil prices do not remain excessively high. In the Canadian stock market, most sectors recorded losses, with basic materials exerting the most significant downward pressure. The consumer non-cyclicals sector was the only one in positive territory.
The Canadian dollar traded at 72.90 cents US, slightly higher compared to the previous day. Reid mentioned that the Canadian dollar has performed well in recent weeks, aligning closely with the U.S. dollar’s safe-haven status.