MONTHLY MARKET MUSINGS

May 2025

Wars On Multiple Fronts

While the trade war and tariffs have been the number one story in 2025, the Russia-Ukraine war and the Gaza war have continued despite the campaign promises by President Trump to quickly end those conflicts. While this has not happened within the timeline originally proposed, the prospect that these two long-standing wars might end this year remains. Given this, it might be interesting to speculate on what the market is likely to do should they end.

In terms of the Russia-Ukraine conflict, if we were to see an initial limited agreement to end the hostilities, it would likely improve GDP in the euro zone incrementally. A longer-lasting comprehensive peace deal, however, would result in a more significant impact. In this scenario, inflation in Europe is expected to decrease by potentially 0.5% while European GDP is anticipated to increase by approximately 0.5% according to Goldman Sachs[1]. The drop in inflation would come mostly through lower energy prices which would help to improve consumer confidence. The lower inflation rate would allow the European Central Bank (ECB) to adopt a more aggressive monetary policy and lower interest rates, and this could fuel more business investment within the European Union. With the U.S. tariffs expected to slow growth in the euro zone, an end to this conflict could potentially serve as an offset to that. In terms of the North American market impact, the end of these conflicts would potentially affect certain industries such as the defense industry, the mining and agricultural industries as well as having an impact on oil and gas as global crude oil prices would likely fluctuate on the news. Generally, though, it is unlikely that this would have a major impact on North American oil and gas stocks. The U.S., specifically, is less dependent on foreign oil and is a net exporter of oil[2]. This means that they are less exposed to shocks in foreign oil supply and prices than they once were, such as back in the 1970s. Thus, conflicts in the Middle East and other areas are less of a concern for the U.S. now when it comes to potential disruptions to the oil supply. The resolution of these conflicts for North American equities would likely be modestly positive as the decreased geopolitical risk would likely reduce the volatility in the overall global markets. Additionally, it would also likely signal that the current U.S. administration has been able to de-escalate global tensions and has managed to accomplish some of its goals in regard to foreign policy.

As mentioned above, the trade war remains the main focus of U.S. and global markets and that is unlikely to change in the near future. In the weeks following "Liberation Day", we saw the market whipsaw back and forth driven by panic, emotions, and uncertainty. Since then, we have seen the U.S. scale back some of the initial trade rhetoric and provide a more reasonable approach to trade negotiations than they originally had signalled. This has allowed the markets to take a breather over the past week or so. With the tariff negotiations underway, the economic effect of the tariffs will become more evident in the coming months. Currently though, the market remains in limbo and many companies have begun to retract and/or not provide guidance given the lack of foresight to properly develop their corporate strategy and plan for the year ahead. The U.S./China trade war is the largest contributor to the current market volatility and will likely have the biggest economic impact on the U.S. If an agreement can be reached without any further escalation between these two, this would likely be viewed as very positive news by the financial markets and should result in less downside risk than is currently being priced into equities. We believe that going forward the news flow is more likely to be positively skewed as the negotiations take place.  

With the Canadian Federal election now done and the trade negotiations beginning, we will soon know more about how the tariffs will play out for Canadians. This should provide investors, economists and the Bank of Canada (BoC) a clearer view as to what we can expect for the Canadian economy in the coming 12-18 months and whether a recession is still a real possibility or not. Unlike the U.S. where the President and Chair of the U.S. Federal Reserve have a confrontational relationship, in Canada, the head of our central bank and the newly elected head of our government seemingly have a good relationship having previously worked together at the Bank of Canada. This should be beneficial in ensuring that both institutions work well together to tackle the tariff situation and minimize any damage done to the Canadian economy.

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com