Markets continue to navigate a familiar mix of geopolitical developments and trade uncertainty, but for now sentiment appear somewhat comfortable looking through the headlines. Recent reports suggesting the United States and Iran have reached an agreement to reopen the Strait of Hormuz have helped ease concerns around one of the more significant risks facing the global economy this year. Equity markets responded positively, bond yields moved lower and oil prices retreated as investors began to price in a reduced likelihood of a major disruption to global energy supplies.

While the news is certainly encouraging, we believe it is still too early to declare victory. Important details surrounding the agreement remain unclear and markets will be looking for evidence that commitments made on paper translate into meaningful improvements on the ground. Even if the agreement proves durable, the process of returning energy markets to normal will likely take time. Shipping activity, production levels, and inventory stockpiles all need to recover from recent disruptions, leaving oil prices somewhat vulnerable to renewed volatility should tensions flare up again. As a result, energy prices may remain higher than they were before the conflict, which could continue to influence inflation and interest rate expectations over the coming months.

Here in Canada, the Bank of Canada elected to leave interest rates unchanged at 2.25% last week, a decision that was widely expected. Policymakers continue to walk a fine line between supporting economic growth and ensuring inflation remains under control. While economic activity has softened meaningfully and unemployment remains elevated relative to recent years, there are also signs that conditions may not be quite as weak as expected. Consumer spending has remained reasonably resilient and slowing population growth means some broad economic measures may understate underlying trends.  That said, expectations remain dull.

For now, the Bank of Canada appears content to remain patient and assess incoming economic data before making further adjustments to interest rates. We generally agree with that approach. While challenges remain, we do not currently see evidence of the type of economic deterioration that would require a more aggressive response from policymakers.

Trade policy is also moving back into focus as Canada; the United States and Mexico approach the first scheduled review of the CUSMA trade agreement. The outcome will be important for business confidence given the deep integration of North American supply chains and the significant role trade plays in the Canadian economy.

Our expectation remains that the agreement will ultimately remain intact, although negotiations are unlikely to be straightforward. We would not be surprised to see periods of market volatility as discussions unfold and political rhetoric intensifies. That said, all three countries continue to benefit substantially from the existing framework, making a complete breakdown in negotiations appear unlikely in our view.

Despite an uncertain backdrop, financial markets have remained resilient. Corporate earnings have generally held up well, geopolitical risks have moderated from their recent peaks and investors continue to look beyond short-term uncertainty toward a more constructive longer-term outlook. While trade negotiations and geopolitical developments will undoubtedly continue to generate headlines, we remain focused on maintaining diversified portfolios designed to participate in long term growth while helping manage the inevitable bouts of volatility that arise along the way.

Should you have any questions, please feel free to reach out.