Canadian and American stock markets experienced a decline 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, highlighted that market movements were cautious amid rising energy prices and inflation risks. This situation led to anticipation of 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, 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 significantly reduced their bets on the possibility of the U.S. Federal Reserve lowering interest rates this year, with some even contemplating a rate hike in 2026, a scenario previously deemed unlikely before the conflict. Lower interest rates typically stimulate economic activity and asset prices, a move advocated by U.S. President Donald Trump. However, the risk of exacerbating inflation remains a concern, limiting central banks’ room to maneuver. Central banks in various regions, including Europe, Japan, and the United Kingdom, maintained their interest rates unchanged in the past week.
The May crude oil contract surged by $2.68 to reach $98.23 per barrel. The price of Brent crude fluctuated significantly from approximately $70 per barrel before the conflict to as high as $119.50 this week, reflecting the uncertainty surrounding the duration and impact of the conflict on oil and gas production in the Persian Gulf.
Reid suggested that sustained high Brent crude prices could shift focus from inflation concerns to broader economic impacts, such as global growth and corporate earnings. Despite the market downturn, the Canadian dollar remained resilient, trading at 72.90 cents US compared to 72.84 cents US on the previous day, showing strength amid safe-haven flows.
Stock markets historically rebound swiftly following conflicts, provided that oil prices do not remain elevated for an extended period. In the Canadian stock market, most sectors experienced negative trends, with basic materials weighing heavily, while consumer non-cyclicals were the only sector showing positive movement.