Stock and bond markets took one on the chin this week, amid rising oil prices triggered by a new war in the Middle East and a disappointing U.S. jobs report on Friday. The April crude oil contract topped US$90 a barrel Friday.
“If you’re unable to weather this volatility, then maybe you’re taking on too much risk,” said Greg Taylor, chief investment officer at PenderFund Capital Management Ltd. in an interview with me on Thursday. “You’re probably overextended.”
Not a bad message for clients struggling to keep their eye on the long term.
The S&P/TSX composite index closed Friday down 3.3% for the week. The S&P 500 fell just 1.5%; the Dow Jones Industrial Average lost 2.4%.
Taylor said there’s a lot of uncertainty among investors. “Everyone’s trying to figure out what to do next,” he said. “It’s hard to make any long-term plans, because it seems every morning … the narrative is changing.”
What was striking this week was how undaunted investors appeared to be, notwithstanding Friday’s losses. Taylor said it seemed to him like they were, “buying the dip. … That’s a bit of a dangerous mentality,” he said. “At some point that’s not going to work, and that’s going to … hurt some people.”
Investors have appeared to be betting on a short-term engagement in the Middle East, although today’s results call that narrative into question. The Financial Times reported an interview with Qatar Energy Minister Saad al-Kaabi today forecasting oil at US$150 a barrel if the U.S.-Iran war escalates and shipping in the Strait of Hormuz remains disrupted in the coming weeks.
That would be considered a worst-case scenario.
“Inflation could come back if oil does spike,” Taylor said. “There have already been some signs that inflation is being a little stickier at the upside that we had feared. So, I think it’s out there, and the markets have been looking for rate cuts in the second half of the year — those will come into question if oil stays higher.”
Canada’s energy sector could benefit
In a report published Monday, Olivier Gervais, director, modelling and forecasting at Scotiabank Economics, wrote that, “[a]s a net energy exporter, Canada benefits from an improvement in its terms of trade when oil prices rise.”
But gains in sector profits and investment will come amidst a rise in the cost of living. Higher gas prices contribute to inflation, which could force the Bank of Canada’s hand on interest rates.
“What gets me worried as an economist is when I see these prices going up and feeding into [the Consumer Price Index],” Gervais said in an interview on Thursday. “If inflation expectation starts to become the anchor, then monetary policy has to react more. We’ve seen that. We learned that in the pandemic.”
Gervais noted in his report that the relationship between the Canadian dollar and the price of oil “has weakened in recent years, especially during supply-driven price spikes.” So, if investors turn to the greenback as a safety measure, we shouldn’t expect the loonie to benefit the way it would have historically.
And while the U.S. has become a net exporter of oil in recent years, the potential inflationary impact could be significant — enough to force the Federal Reserve to tighten monetary policy.
“I think now the market is realizing that the conflict is going to take a bit of time,” Gervais told me. By week’s end, it seemed to have dawned on investors that they might be wrong.