February 2025 - Trade tensions

The stated objective of the tariffs is to promote U.S. manufacturing and to reduce the country’s trade deficit. Tariffs are also used as leverage in negotiations concerning international trade relations. Market participants are struggling to assess their true scope and long-term consequences. Concerns about higher inflation and slowing global growth have intensified, primarily because of the risks of retaliation from trading partners. 

For Canada, the repercussions are significant. The manufacturing and automotive sectors are on the front line, as are commodity exporters. With the announcement of a 25% tariff on Canadian imports, the Canadian dollar fell sharply at the end of the month. That being said, the markets are adapting quickly, and, if need be, the Bank of Canada can adjust its policy to support the economy.

In this context, it is essential that investors maintain a long-term view combined with sound diversification. The situation is evolving quickly, with new announcements almost daily. Moreover, the markets have already demonstrated their ability to absorb this type of shock, such as during President Trump’s first mandate. Companies’ ability to adjust their supply chains and the possibility of further negotiations could also mitigate some of the risks.

Sources: Bank of Canada, Bloomberg Finance L.P.

The Trump administration’s announcement of a 25% tariff on Canadian imports plunged the country into uncertainty. Even so, the Canadian market was relatively resilient, with the S&P/TSX Index down only -0.4% in February. The energy sector was one of the main detractors, owing to the drop in the price of oil. Information technology also suffered from a sector-wide pullback owing to the high valuations of some artificial intelligence-related stocks, exacerbated by the discrepancy between development costs and expected revenues. In contrast, the materials and utilities sectors contributed positively to the return. 

The bond market recorded a positive performance, with the FTSE Canada Universe Bond Index up 1.1% on expectations of interest rate cuts.

The U.S. market had a mixed month. The S&P 500 Index rose at the beginning of the month on an optimistic growth outlook but ultimately retreated amid concerns over inflation and tariffs, which led to higher volatility at the end of the month. At the same time, consumer confidence fell sharply. 

In the end, the S&P 500 returned -1.8% in Canadian dollars and -1.3% in U.S. currency. The decline of the mega caps, including Tesla, Amazon.com, Alphabet and Microsoft, detracted from the return the most. 

In response to the uncertainty, the Federal Reserve maintained a cautious approach, signalling it would postpone further rate cuts until inflation was better controlled.

Despite the uncertainty, the developed markets outside North America rose 1.4% in Canadian dollars and 1.0% in local currencies, as measured by the MSCI EAFE Index. The return was due mainly to the strength of the European markets, particularly the United Kingdom, Germany and Switzerland, as well as the financial sector. As for monetary policy, the European Central Bank and the Bank of England continued their easing cycles. 

Emerging markets experienced high volatility in February. For much of the month, they were buoyed by Asian technology and semiconductor stocks. That being said, the announcement at the end of the month of a new 10% tariff on Chinese exports to the United States caused Chinese stocks to fall sharply, offsetting earlier gains. As a result, the MSCI Emerging Markets Index was flat in Canadian dollars and posted a modest gain of 0.8% in local currencies.