Diary of a Portfolio Manager

“Where do I find the words to say?
How do I teach him?
What do we play?
Bit by bit, I've realized
That's when I need them
That's when I need my father's eyes”

Happy Father’s Day this weekend to all no matter how it impacts you!  The above Clapton song is about his views of his father whom he never knew and his role as a father so seems appropriate.  Or, maybe a bit too sombre…

Geopolitics: A Deal At Last?

Reports that the U.S. and Iran have signed a memorandum of understanding to reopen the Strait of Hormuz marks a constructive step toward reducing tensions. If successfully implemented, such an agreement would materially reduce the probability of the most adverse economic scenarios, particularly those involving a renewed surge in oil prices. Financial markets have reacted positively to the news: equity markets rallied, bond yields declined, and oil prices retreated.

Nevertheless, key questions around the deal’s scope, durability, and enforcement mechanisms remain somewhat unclear, and we think developments in the coming weeks will be important to monitor as markets search for evidence of follow-through. Most significantly, the road from announcement to normalization is likely to be a long one for the energy market.

Shipping traffic through the Strait and energy production across the Middle East will require considerable time to recover from recent disruptions due to complex logistical hurdles, while depleted global oil inventories will need rebuilding before markets regain a more comfortable cushion against future shocks. These factors could leave energy markets sensitive to renewed tensions during the transition period. As a result, oil prices are likely to retain some geopolitical risk premium and may not return to the pre-conflict range of $60–70 per barrel in the near term, suggesting that the effects on the outlook for inflation and interest rates could linger even as the downside risks to the economic outlook have notably diminished.

Canada: BoC Remains Patient Amid Uncertainty

The Bank of Canada (BoC) held its policy rate steady at 2.25% last week. Given the widely expected decision, attention shifted to Governor Tiff Macklem's comments, which were broadly consistent with RBC Economics’ cautiously optimistic view that underlying economic conditions, particularly on a “per-person” basis, should continue to improve gradually.

Recent labour market data suggest tentative signs of stabilization, although conditions remain softer than historical norms. The unemployment rate has fluctuated between 6.5% and 6.9% this year, while slowing population growth may be causing aggregate economic indicators to understate the performance of the economy on a per-worker basis. Despite higher energy prices, consumer demand has held up reasonably well. Taken together, these trends provide the BoC with flexibility to await more data on growth and inflation as policymakers evaluate the path forward for interest rates.

CUSMA: Review Process In Focus

A key assumption behind RBC Economics’ outlook for the Canadian economy is that the CUSMA framework remains largely intact. Although the U.S. has imposed sector-specific tariffs on certain Canadian goods, most Canadian exports enter the U.S. duty-free under the agreement, helping to cushion the economy from broader trade disruptions.

CUSMA’s first scheduled six-year review is set for July 1, at which point Canada, the U.S. and Mexico can agree to renew the pact for an additional 16-year term through 2042, potentially alongside negotiated revisions. Even absent an extension, the framework remains in force by default until 2036, with annual reviews serving as a mechanism for continued negotiations.

An extension would likely provide a modest boost to business confidence by reducing uncertainty that has weighed on investment and hiring decisions, especially if it included rollbacks of U.S. tariffs on steel, aluminum and autos, which Canadian negotiators have reportedly made a priority. Meanwhile, the U.S. could push for changes in areas such as auto-content rules, dairy market access and restrictions on Chinese inputs.

A no-extension outcome by July 1 would leave lingering uncertainty, though practical implications are likely limited as the existing framework would remain operational. We believe investors should prepare for potentially challenging headlines as negotiations unfold, but we continue to view an outright withdrawal from CUSMA as unlikely given the deep integration of North American supply chains.

Takeaway

Despite an unsettled backdrop, corporate earnings and receding geopolitical risks have supported equity markets. Admittedly, headline risk from trade negotiations could create intermittent volatility, but our base case remains that the North American trade framework stays broadly intact. We remain focused on keeping portfolios diversified and balanced, keeping cash on hand where needed help us form an approach that we believe is well-suited to capture the upside in our base case while managing through the inevitable bouts of volatility that are par for the course.

J. Todd Kennedy, CIM, FCSI | Senior Portfolio Manager | Kennedy Wealth Management | RBC Dominion Securities Inc. | Phone: 613-566-4582 | Cell: 343-961-3820 | Toll Free: 800-461-1958 | World Exchange Plaza | 45 O’Connor St. Suite 900, Ottawa, ON K1P 1A4 | http://www.toddkennedy.ca

Disclosures

This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities.