Canada's main stock index shook off a four-day losing streak on Friday, closing up 0.6% even as investors braced for what many expect will be another interest rate hike from the U.S. Federal Reserve next week. The S&P/TSX Composite rose to 35,719.38, recovering from a near six-week low touched earlier in the session.
The catalyst was a sharp drop in oil prices. Crude slid 2.5% after the Financial Times reported that Middle East officials are discussing a deal with Iran that could restore shipping through the Strait of Hormuz. The strait is a critical chokepoint for global oil supplies, and any easing of tensions there tends to reduce the risk premium built into energy prices.
Why oil matters to the TSX
Energy is a heavyweight sector on the TSX, so moves in crude often move the whole index. When oil falls, energy stocks typically drag the market lower. But Friday's session was different: the broader index rose even as oil declined, suggesting that investors saw the drop in crude as a net positive for the economy.
Lower oil prices can cool inflation, which is exactly what central banks want to see. With the Fed expected to raise its benchmark rate next week, any sign that price pressures are easing could reduce the need for aggressive tightening down the road. That helps growth-sensitive stocks, which had been under pressure from worries about higher borrowing costs.
The oil market's reaction to the Hormuz talks shows how sensitive prices are to geopolitical headlines. Even a hint of a diplomatic breakthrough can move crude by several percent, and that volatility ripples through equity markets.
Fed hike odds jump to 86%
Traders are now pricing in an 86% chance that the Fed raises interest rates at its meeting next week. That's a big shift from just a few weeks ago, when markets were split on whether the central bank would hold rates steady.
Higher rates tend to weigh on stocks, especially those in technology and other growth sectors, because they make future earnings less valuable. But the TSX is heavily weighted toward financials, energy, and materials—sectors that can benefit from a stronger economy and higher inflation. That mix may explain why the index managed to gain even with a hike looming.
For Canadian investors, the Fed's move matters beyond just stock prices. A rate hike in the U.S. often puts pressure on the Canadian dollar and can influence the Bank of Canada's own policy decisions. Oil's earlier surge to $100 had already complicated the currency picture, and Friday's pullback may offer some relief.
What it means for investors
For everyday investors, the key takeaway is that markets are navigating two opposing forces: the drag of higher interest rates and the boost of lower energy costs. When oil falls, it can ease inflation fears and support consumer spending, but it also hits energy company profits and can hurt the Canadian economy, which is a major oil exporter.
The fact that the TSX rose despite the oil drop suggests investors are betting that the inflation relief outweighs the energy sector's losses. That's a delicate balance, and it could shift quickly if the Hormuz talks fall through or if the Fed signals more hikes than expected.
It's also worth noting that the Red Sea shipping disruptions and tanker attacks near Hormuz have kept oil prices elevated for weeks. Any resolution to those tensions could bring prices down further, which would be good for consumers but a headwind for energy stocks.
Investors should watch the Fed's decision and statement next week for clues about the path of rates. Also keep an eye on oil prices—if the Hormuz deal materializes, crude could fall further, and that could shift the TSX's direction once again.
"The market is trying to figure out whether lower oil is a net positive or negative for Canada," said one strategist. "Today, the inflation relief won out, but that could change quickly."
As always, diversification remains a sensible approach. Energy and financials may benefit from different conditions, and a mix of sectors can help smooth out the bumps.
