-- The Toronto Stock Exchange was down again on Monday, its seventh loss over the last eight trading sessions, as tensions spike around the Strait of Hormuz, the Bank of Canada is seen embarking on an "aggressive tightening cycle in the near term" and the Canadian federal government appears to be preparing people for a drawn out trade war with the United States.
The S&P/TSX Composite Index closed down 252.31, or 0.7%, to 33,638.87, with most sectors lower, led by Base Metals, down near 2%, amid weaker gold prices. Energy was the biggest gainer, up 1.35%, on an elevated oil price.
According to FactSet the TSX going in to today was down 455.11 points, or 1.33%, over the last two losing weeks. Still, year-to-date the index was up 2,178.42 points, or 6.87%, as of last Friday's close.
In the Strait of Hormuz, the BBC on Monday afternoon noted, among other related headline stories, that President Trump said the U.S. struck seven Iranian fast boats after vowing to help stranded vessels out of the Strait of Hormuz, while Iran's military said it fired warning shots at American warships.
Royce Mendes, Head of Macro Strategy at Desjardins, said the resumption of "kinetic conflict" in the Iran war has prompted a reassessment of the global monetary policy outlook. In Canada, he noted, Overnight Index Swap (OIS) markets now imply the Bank of Canada will embark on an "aggressive tightening cycle" in the near term. "In our view, current market pricing appears to be embedding persistently high oil prices, somewhat consistent with the upside risk scenario outlined by the Bank just last week," said Mendes.
In its Monetary Policy Report, Mendes noted, the BoC's base case projections were conditioned on a "relatively benign" oil-price assumption. However, he also noted, policymakers also highlighted an alternative scenario in which oil prices remain near US$100 per barrel for at least the next two years. While growth in that scenario is only modestly stronger than in the base case, inflation is materially higher and more broad based.
Governor Macklem, Mendes noted, emphasized that if higher energy prices translate into "ongoing generalized increases in inflation", multiple rate hikes would likely be required. Mendes said current market pricing already appears to incorporate both the timing and much of the magnitude of the tightening Desjardins would expect under such conditions. To arrive at this conclusion, Desjardins employed a Taylor Rule consistent with BoC literature, supplemented with judgment to replicate a forward looking policymaker. In this scenario, the yield curve would likely flatten further, reflecting the assumption that policy tightening would ultimately prove temporary, Mendes added.
By contrast, the Desjardins base case assumption is that oil prices begin to retrace in the coming months, creating a compelling case for a reversal in rates markets. "While inflation concerns currently dominate the narrative and investors are increasingly hedging against the risk of runaway inflation, we view the present environment as fundamentally different from the post-COVID period, when inflation surged amid extraordinary policy support and acute supply disruptions," Mendes said. "Moreover, existing fragilities in the Canadian economy and financial system would make an extended or aggressive tightening cycle particularly costly," he added.
This comes as the federal government is launching a new $1 billion loan program for steel, aluminum and copper businesses impacted by U.S. President Trump's tariffs.
Industry Minister Melanie Joly and minister responsible for the Federal Economic Development Agency for Southern Ontario Evan Solomon made the announcement in Ontario on Monday morning. "The new measures announced today will protect workers and ensure companies have the tools and financing they need to keep operating, growing, and building Canada's strength at home," Joly said in a statement. The funding was not part of last week's spring economic update.
Joly pointed to the Trump administration's adjustment to Section 232 tariffs, which imposed 50% duties on items made entirely or almost made entirely of steel, aluminum and copper, and 25% levies on derivative items, as a reason for the initiative. Those tariffs came into effect on April 6.
Canada has imposed a 25% tariff on a list of U.S. steel product imports worth $12.6 billion and aluminum products worth $3 billion in response to Trump's tariffs. The federal government has also slapped a 25% surtax on specific Chinese steel and aluminum products and quota restrictions to combat unfair trade practices and overcapacity as a way to help those industries.
Of commodities, West Texas Intermediate crude oil closed higher Monday in volatile trade as traders eye escalating violence in the Persian Gulf. WTI oil for June delivery closed up $4.48 to settle at US$106.42 per barrel, while July Brent oil was last seen up $6.53 to US$114.70.
But gold traded lower by midafternoon Monday as the dollar and yields rose, forcing the precious metal below the tight range it has stuck within for the past month. Gold for June delivery was down $112.20 to US$4,533.20 per ounce, the lowest since March 27.