The impact of Trump’s statements on the markets

Pierre: Hello everyone and welcome to the “In Your Interest” podcast. My name is Pierre Dolbec and once again I'm joined by my colleagues, Sebastien Mc Mahon, Chief Strategist, and Dominic Siciliano, Senior Vice-President and Head of Fixed Income. And, well, we still have a lot to talk about, gentlemen.

Sébastien: Yeah, absolutely. And again, who better than our guest, Dominic Siciliano, here, to try to read the tea leaves about what this means for the markets and especially fixed income, because this one's a bit complicated. So we thought, you know, why not bring the best of the best? Dominic, with us today here.

Dominic: You're too kind. Thank you very much. It's my pleasure to be here.

Pierre: And let's talk with the best of the best right now about oil prices, Dominic.

Dominic: Well, you know, we’re ultimately going to have higher prices at the pump for consumers if the 10% tariff goes through. If there's a way to break it down, it’s that the 10% increase in tariffs on Canadian energy would increase the cost for crude oil for US refiners and consumers. The tariff will also have an impact on the profitability of Canadian oil companies. So the consumer ultimately is going to pay a higher price at the pump. And that is a tax on consumption. It weighs on people's savings and ability to have, you know, a better financial situation. So, it's pretty negative for us. And obviously our energy sector will be impacted. So could it be an impact further down the line on credit spreads? On how rating agencies view certain corporations? Those are things to take under consideration. But it's going to be ultimately us, the consumer, paying higher for our oil prices.

Pierre: And Sébastien, what can you tell us about the Canadian dollar right now?

Sébastien: Yeah. The Canadian dollar is an interesting one because it had already weakened by about $0.05 between October and January, so going from $0.72 to $0.67 in anticipation of upcoming tariffs. So at those levels, at $0.67 and even more today at about $0.70, we understand that the foreign exchange market is expecting the issue to be transitory. But if tariffs at some point are expected to be permanent, then we foresee that the Canadian dollar could trade closer to the low 60 to 65 cents range against the U.S. dollar. But if enough ramp materializes in the short run and this is negotiated away, then we could have more of a bounce on the Canadian dollar. So, you know, in our funds, we did already start to build a position when we were sliding all the way towards 65, 67 cents on the threats of tariffs when they were imminent. We thought that maybe, you know, there could be a way out. Maybe there's too much pessimism priced into the Canadian dollar. So we did start to build a position there. So far so good. But we need to stay very humble here. If a resolution is slow or if a resolution does not happen, then the Canadian dollar could trend towards the low 60s. So a high degree of uncertainty remains here. But the Canadian dollar will be one of the variables to watch in 2025.

Pierre: And what have you observed and maybe what can you foresee about equity markets?

Sébastien: In the U.S. more specifically, there is a very high market concentration in the Magnificent Seven. So the stocks that are more tightly linked to the AI theme. The Nvidias of this world, the Amazons of this world, Apple, Tesla. So since those stocks are less impacted by the current trade war, it kind of limits the overall direct market impact that we could see on the U.S. stock market. But still, the broader risk sentiment can still affect the Magnificent Seven and other stocks. So industries that are more directly impacted by tariffs, like automakers and industrial companies, may feel the brunt of an impact in the U.S. stock market, even if it's slightly protected from all of this. You know, there could be some impacts there.

For the Canadian stock market, of course, a more generalized macro impact may be priced in quickly initially. So that means that we could have a pullback in the Canadian stock market. But whether this is a lasting shock or a one-off bout of volatility will largely depend on the fiscal and monetary mitigating measures that we see. So if the federal government does something, provincial governments do something, if the Bank of Canada reacts to that, and, of course, whether the trade war persists or if it fades pretty quickly.

Pierre: Thank you. And Dominic, what can you tell us about interest rates and bond markets right now?

Dominic: That's a very difficult question to answer. And, you know, it keeps me up at night honestly. If we break it down into two sections, we can talk about the impact the Bank of Canada will have on the economy and the structure of rates in Canada, and then maybe a little bit more about the credit markets. But the Bank of Canada is really in a difficult situation, because if we have a slowdown in the economy, the first reflex obviously is to cut rates to stimulate and alleviate some of the pressures on the Canadian consumer. However, if it's inflation driven through tariffs, through higher oil prices, through consumer goods costing more, you're lowering interest rates and you're maybe accelerating the inflationary pressures on the consumer. So how do we keep that equilibrium in place?

For the bond market, it probably means also a steeper curve and maybe rates that don't go down as much in the long end or ten-year sector, with rates that are being cut to protect the Canadian economy and probably a little bit of possibility of having a higher rate structure in Canada regardless. And that's the inflation play on that end.

I would caution that we're not going to have a cataclysm. Well, we could always have a cataclysm, but I would caution we're not going to have a cataclysm like in 2022 because we do have a good level of coupon in the bonds. And as a reminder, the coupon in the bond is important because it protects investors, notably against that rise in interest rates. You know, it's that mechanism in the bond market that helps you protect and we didn't have that in the 2022 crisis because, you know, rates were so low.

So there's a bit of built in protection in the bond market here. But overall, it's probably not going to be as stellar if we do get a bout of inflation with rates moving higher. So that's the first thing to take into consideration. Once again we talk about equilibrium and balance. You know, all financial markets are interrelated. What happens on the rate cycle will have an impact on the valuation of the Canadian dollar. So then once again you have a weaker Canadian dollar with rates lower. And that also can spur inflation because we're in an importing country of products. And it's another tax on our consumers. So these are all things to keep in perspective when evaluating the economy and especially the bond market at that point.

And once again, when we talk about equilibrium, what's the impact on the equity markets of these tariffs? If companies are less profitable because of that, if they're not able to pass on the full spectrum of the increase, they become less profitable. That lowering profitability has impacts on credit ratings, on their ability to finance themselves. So that also is worrisome.

So, when I think about the credit market as the second part of the fixed income, you know, historical heights in terms of corporate credit globally, especially in Canada and in the US, even high yield is doing extremely well, well, those are pain areas. Those are areas where we can see a widening of those spreads and maybe some things being repriced in an environment where we have a recession, job losses, the consumer is a little bit less present in the marketplace, some companies might have to reevaluate some of their growth forecasts. All those things will have a significant impact on the credit spreads, and I think that's a little bit of the weak point here in the marketplace.

So, we're a little bit more cautious in our portfolio construction because of that. So, a lot of things to think about in your portfolio construction at this point: the rates, the Canadian dollar and the ultimate impact on the consumer and the credit market, which is, you know, driven by equity performance to a certain extent also. So that's what we're watching right now in the marketplace.

Sébastien: Yeah, it is a very complicated situation within fixed income because of course, what are central banks going to do in there? They're going to have to communicate very effectively. Likely they're on the sidelines right now: the Bank of Canada, the Fed. When will we see another move and which direction will the move be in? Of course, you know, for financial markets this is causing a lot of uncertainty. And markets tend to not appreciate uncertainty. But also, the economic impact of all of this, you know, what kind of rates will we see in the future? What kind of trade regime will we be on? So you know, what do you do with the investments that you wanted to do in a new plant? Are you going to be investing in 2025? In 2026? Investing in Canada, in the U.S. or abroad? This is all very complicated. So, you know, spotlight on the Bank of Canada, the Fed, the ECB in 2025 for sure.

Pierre: A lot of very good points, gentlemen, I think we're going to have a lot to discuss all throughout the year with these topics.

So, I want to thank you both Sébastien and Dominic for this enlightening discussion. I'm pretty sure we're going to have other opportunities to revisit these topics throughout 2025. Thank you to all our listeners as well. See you in two weeks’ time for the next episode of the “In Your Interest” podcast.

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