The Toronto Stock Exchange closed lower for a third-straight session Monday, ahead of tomorrow's Spring Economic Update from the Carney government, as one Macquarie strategist warned the risk of adverse effects on the global economic supply chain will grow if the U.S.-Iran 'economic war' endures.
The S&P/TSX Composite Index closed down 85.92 points, or 0.25%, to 33,818.19, with most sectors lower, albeit none of them by as much as 1%.
In contrast, Energy was up 2.3% with West Texas Intermediate crude oil closing higher Monday as talks expected to be held over the weekend between the United States and Iran in Pakistan did not happen, even as Iran offered to reopen the Strait of Hormuz in return for it being allowed to continue its nuclear program and the U.S. ending the blockade of its ports. WTI oil for June delivery closed up US$1.97 to settle at US$96.37 per barrel, while June Brent oil was up $3.13 to US$108.46.
Base Metals rose 0.4% even though gold prices were down by midafternoon Monday. They did remain rangebound as the dollar fell ahead of Wednesday's interest rate announcement from the Federal Reserve. Gold for June delivery was down US$42.60 to US$4,698.30 per ounce, staying within a US$200 range it has been stuck in since the start of the war on Iran, as high oil prices raise concerns over higher inflation and threaten to boost interest rates.
Thierry Wizman, Global FX & Rates Strategist at Macquarie Group, expected traders to retreat from risk following the news on Saturday that a new round of face-to-face talks between the U.S. and Iran was not going to happen imminently. But, he said, an Axios report this morning restored some 'hope', by saying that Iran's side has put forward a new proposal to allow a reopening of the Strait of Hormuz in the short term, while asking that the negotiation pertaining to Iran's nuclear ambitions is left for later.
"We doubt that the U.S. will go for this, since the US's economic blockade of the Iran remains its key "pressure tactic" in making Iran concede to the US's fundamental demands pertaining to Iran's power. Yet that it is Iran that is making the proposal suggests that the pressure from the US's economic blockade is being felt, and that the U.S. may not need to invoke its military power again. To the U.S. administration, the economic blockade of Iran is intended to have that very effect, i.e., of causing revenue losses that lead to monetary inflation and, ultimately, instability within the regime, and leading to concessions from Iran on the fundamental issues that the U.S. has raised," Wizman added.
Wizman said while central banks are mindful of the inflation that supply side disruptions may cause, he added the central banks that meet this week (Fed, Bank of Canada, Bank of England, European Central Bank, Bank of Japan) and next week (Reserve Bank of Australia) are unlikely to change policy settings, although some may do so later this year. The Bank of Canada is widely expected to maintain its key benchmark interest rate steady on Wednesday.
Still on the Canadian economy, CIBC in 'Thoughts on the Spring Economic Update' due out from the federal government tomorrow said Prime Minister Mark Carney made two important announcements this morning, including the introduction of a Canadian sovereign wealth fund, and suggesting tomorrow's update will showcase a better deficit profile across the forecast horizon
According to CIBC, improvement for the current fiscal year reflects a better starting point, as already telegraphed by the Department of Finance in its most recent Fiscal Monitor, showing the FY25-26 deficit is tracking near C$26 billion as of the end of February, which compares to an initial full year projection of C$78 billion. CIBC noted March is typically a very big deficit month, reflecting tax payments. But, CIBC said, calibrating from prior years suggests the FY25-26 deficit is likely to come in some $15 billion to $20 billion lower than initially expected.
For the current fiscal year, FY26-27, CIBC estimates an improvement between $5 billion to $10 billion. "But," it said, "that doesn't mean coupon supply is going to fall one-for-one". First, CIBC noted, there have already been new spending initiatives announced that will "eat" some of the "better starting point" to the current fiscal year. Second, it noted, non-budgetary transactions are tracking worse than expected. Third, it also noted, the SWF needs to be seeded with an initial endowment of $25 billion.