Canadian and U.S. stock markets experienced declines 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 reacting with risk-averse behavior amid rising energy prices and inflation risks. This shift has led to expectations of potential central bank interest rate hikes, affecting various asset classes, including equities.
The S&P/TSX composite index fell by 537.57 points to 31,317.41, while in New York, the Dow Jones industrial average dropped by 443.96 points to 45,577.47. The S&P 500 index also saw a decrease of 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 cutting interest rates this year, with some even considering the Fed raising rates by 2026, a scenario that seemed improbable before the conflict. Lower interest rates, which were previously anticipated to stimulate the economy and investment prices, now pose a risk of exacerbating inflation. The reluctance to cut interest rates is a global trend, with central banks in Europe, Japan, and the United Kingdom maintaining steady rates this past week.
The price of the May crude oil contract rose by $2.68 US to $98.23 US per barrel. Brent crude prices have fluctuated dramatically, climbing from around $70 US per barrel before the conflict to as high as $119.50 US this week. These fluctuations reflect uncertainties in predicting the war’s duration and its impact on oil and gas production in the Persian Gulf.
Despite the market downturn, it is noted that stock markets have historically rebounded swiftly following conflicts, provided that oil prices do not remain elevated for an extended period. In the Canadian stock market, most sectors experienced negative performance, with basic materials weighing the heaviest, while consumer non-cyclicals was the sole sector in positive territory. The Canadian dollar traded at 72.90 cents US compared to 72.84 cents US on Thursday, showing resilience in the face of market volatility according to Reid.