Q1 2025 market update: Trade tensions impact markets

The United States (U.S.) put extra taxes, called tariffs, on goods coming from several countries, including Canada. This move caused some worry about how it might slow down business and economic growth, not just in Canada but around the world. In response, some countries put their own tariffs on U.S. goods. It's a complex situation -- but we're here to break it down for you and share thoughts on what it means for the economy and financial markets.  While there may be some hurdles to overcome, markets can face challenges and still grow in the long run.

Trade tensions raise economic doubts

Talk about tariffs escalated as the new U.S. Presidential team came into office. The initial set of tariffs was a 20% tariff on Canada and Mexico. Canadian energy exports had an exception at 10%. There would also be a 10% tariff on China. The U.S scaled back tariffs on certain products from Canada and Mexico because of the United States-Mexico-Canada Trade Agreement. Tariffs on China later doubled.

The U.S. also applied a 25% tariff on aluminum and steel imports. This affects every country that exports aluminum and/or steel to the U.S. Several economies retaliated with tariffs of their own. Others opted to negotiate with the U.S. The U.S. also announced retaliatory tariffs and tariffs on automobiles, which are set to take effect in early April.

Canada responded with tariffs on some U.S. products while talking with the U.S. to end tariffs. Markets expect Canada’s economy to slow amid trade issues with the U.S. This is not the first time Canada’s economy has gone through a period of uncertainty. 

How are large economies doing?

• The U.S. economy grew at an annualized pace of 2.4% in the fourth quarter (as reported in the first quarter).
• China’s economy grew by 5.4% year-over-year.
• Europe’s economy was unchanged (0.0%).
• The U.K. economy expanded by 0.1%.
• Japan’s economy grew by 2.2%, annualized.

Equity markets post mixed results

• International stock markets rose, benefiting equity investors.
• North American equity markets experienced some volatility. Economic uncertainty often leads to investor doubts, which contributes to equity market swings.
• Equities in the U.S., China and Japan posted a loss.
• Equities in Canada, the U.K., Europe, EAFE and emerging markets gained. A well-diversified portfolio can help manage your portfolio through periods of volatility.
• Global bond prices increased while bond yields were slightly lower. Bond yields saw deep swings in response to trade and economic uncertainty. Bond investors will earn higher interest income when yields are higher.
• Canadian bond prices finished higher and bond yields declined. The BoC’s two interest rate cuts put downward pressure on bond yields.
• Oil prices declined. The Organization of the Petroleum Exporting Countries (OPEC) said it would increase production in April 2025. With trade tensions expected to weigh on economic activity, demand for oil could slow.
• Gold prices reached a new record high as investors believe the metal provides relative safety.

Central banks monitoring trade tensions

Some central banks continued to lower interest rates, while others held steady or raised them. All are carefully analyzing the impact of global trade issues.

• The BoC lowered its policy interest rate by 50 bps to 2.75%.
• The Fed held its federal funds rate steady at 4.25%-4.50%.
• The European Central Bank lowered interest rates by 50 bps.
• The Bank of England reduced its policy interest rate to 4.50%.
• The Bank of Japan raised its key interest rate by 25 bps to 0.50%.
• The People’s Bank of China held steady.

How is Canada’s economy doing?

Canada’s economy strengthened at the end of 2024, helped by lower interest rates. However, markets are now nervous about economic strength.

• Canada’s economy grew by 2.6%, annualized, over the fourth quarter.
• Consumer spending was the main driver of growth. Lower interest rates helped boost consumer spending. Canada’s economy also benefited from stronger exports.
• Canada’s unemployment rate was 6.6% as of February. The economy added jobs over the quarter. The BoC lowered interest rates in part due to improving the labour market.
• Canadian equities reached a new record high early in the quarter. Canadian equities finished slightly higher. The Materials and Utilities sectors were the strongest performers. The Health Care and Information Technology sectors posted the weakest returns.
• The yield on the benchmark 10-year Government of Canada bond declined. 

What can investors expect in the future?