^InsightsMarket and Economic Update – February 2025

As we move into the second month of 2025, financial markets are navigating a complex landscape. On one hand, economic data from the U.S. remains relatively strong, fuelling optimism for a soft landing. On the other hand, geopolitical tensions, trade policies, and inflationary concerns continue to keep investors on edge.

Stock Markets: A Mixed Start to the Year

Equity markets started the year on solid footing despite some volatility. In January, the S&P 500 gained 2.8%, while the Canadian S&P/TSX Index rose 3.5%. European markets also performed well, with the MSCI EAFE Index up 5.3%. However, emerging markets lagged, reflecting ongoing global economic uncertainty.

One of the biggest stories of the month was in technology stocks. The sector experienced a pullback as China introduced its DeepSeek artificial intelligence model, intensifying global competition. The tech-heavy Nasdaq 100 managed gains, but U.S. tech giants struggled to maintain momentum.

In Canada, financial and materials stocks performed well, helping the TSX Index extend its gains. Small-cap stocks also saw modest improvements, though they continue to trade at a discount relative to large caps.

Bond Markets: Stability Amid Rate Policy Divergence

The Canadian bond market gained 1.1% in January, as lower yields supported fixed-income investments. The Bank of Canada cut its benchmark rate by 25 basis points, citing slowing economic activity and controlled inflation. In contrast, the Federal Reserve held rates steady, leading to a widening interest rate differential between Canada and the U.S.

U.S. Treasury yields hovered around 4.6%, suggesting that markets expect the Fed to cut rates later in the year. The divergence between Canadian and U.S. interest rate policies has also pressured the Canadian dollar, which continued to weaken against the U.S. dollar.

Commodities & Currencies: Gold Shines, Oil Remains Flat

Gold prices surged 7.0% in January, driven by increased demand for safe-haven assets amid global uncertainty. Oil prices, however, remained relatively unchanged.

One of the key factors influencing oil markets is the U.S. administration’s approach to energy policy. President Trump has vowed to increase U.S. oil production and cut energy prices, but industry experts suggest this could take time to materialize. Meanwhile, Canadian oil remains a crucial supply source for U.S. refiners, accounting for 60% of U.S. oil imports.

On the currency front, the Canadian dollar depreciated against the U.S. dollar, largely due to concerns over potential tariffs on Canadian exports and the Bank of Canada’s more accommodative stance on interest rates.

Trade & Economic Policy: The Wild Card for 2025

One of the biggest uncertainties for the market in 2025 is the evolving U.S. trade policy. The Trump administration has already made headlines by proposing 25% tariffs on Canadian and Mexican imports, though implementation has been delayed by 30 days.

Historically, trade wars have had mixed effects on markets. The last major tariff conflict in 2018–2019 saw heightened volatility but was eventually overshadowed by broader economic concerns. This time, the risk is higher, as inflation concerns could limit the government’s ability to use tariffs as a negotiation tool. A blanket 10% tariff, for example, could push up U.S. consumer prices by 1% or more, creating further inflationary pressures.

For Canada, the impact could be significant, affecting key export sectors like energy, manufacturing, and agriculture. The Canadian dollar has already weakened in anticipation of trade disruptions, and bond markets have responded with increased demand for safe-haven assets.

For a deeper dive into how tariffs are reshaping Canada’s economic outlook, read our full analysis here: The Trade War Begins: How Tariffs Are Reshaping Canada’s Economic Outlook

Looking Ahead: What Investors Should Watch

1. Federal Reserve & Bank of Canada Rate Decisions – Markets expect rate cuts later in the year, but timing remains uncertain.
2. U.S. Trade Policies & Tariffs – Potential new tariffs on Canada, Mexico, and China could impact global trade.
3. Inflation & Commodity Prices – Oil and energy markets will play a key role in shaping inflation trends.
4. Equity Market Momentum – After a strong 2024, investors are watching whether markets can sustain gains in 2025.