Market Watch: March 7, 2025

U.S. equity markets initially rose on hopes for a tariff delay and a rebound in Tesla shares but fell midweek as tariffs took effect. A one-month-long pause for some tariffed goods covered by the USMCA and a strong yet below expectation jobs report helped recover some losses, but markets ultimately closed in the red. Canadian markets mirrored U.S. trends, with equities falling due to tariffs uncertainty. In Europe, a surge in defense and automaker stocks, along with an improving inflation backdrop and a European Central Bank (ECB) rate cut, lifted markets, though trade tensions weighed on gains. China saw early-week gains from anticipated stimulus measures, but these were offset by weak import data and trade uncertainties with the U.S. and Mexico.

Highlights:

U.S. markets returned -3.06%¹ for the week after tariff concerns weighed on investor sentiment. Labour market resilience helped buoy markets late week despite Friday’s jobs report coming in below expectations (150k actual vs. 160k expected).
Canadian markets returned -2.44%² for the week as tariffs weighed heavy on most sectors. Similar to the U.S., a relatively constructive yet soft jobs report helped markets recoup some losses late-week.
European markets returned 3.12%³ for the week, lifted by surging defense and automaker stocks after the EU announced an $800bn defense initiative. Declining inflation and an ECB rate cut also served as a tailwind.
Emerging markets closed 3.40%⁴ higher for the week, supportred by anticipated stimulus measures ahead of the National People’s Congress. Gains were offset somewhat by weak import data and ongoing trade uncertainties.

Bonds falter amid volatile week of trading

Fixed income rates were volatile for the week, with short- and long-term yields diverging as investors keep an eye on both economic growth and inflation. Canadian bond yields followed a similar pattern, with rates rising despite disappointing employment figures and trade tensions. In Europe, bond markets experienced volatility but were more stable than in past weeks, with yields rising on increased defense spending and mixed economic data, despite the ECB’s rate cut.

Highlights:

The 2-year U.S. Treasury yields was 9 basis points (bps) lower while the 10-year yield was 2 bps higher. In Canada, the 2- and 10-year yields were 1 bps and 10 bps higher, respectively. Bond yields and prices move inversely to one another.
In Europe, concerns over a spike in sovereign debt issuance to fund defense spending drove yields higher.
Credit spreads continue to widen due to a steady primary supply of both investment grade (IG) and high yield bonds. There were at least five issuers postponing their deals late-week due to market conditions and volatility.

Weekly dashboard

Canada’s trade surplus in January exceeds expectations, jumps to nearly $4 billion

Canada’s trade surplus in January exceeded expectations by a wide margin to post a 32-month record as fears of tariffs from the U.S. pushed exports of cars and energy products, especially south of its border. According to Statistics Canada (StatCan), Canada posted a trade surplus of $3.97 billion, more than double the upwardly revised $1.69 billion seen in December. This was a second consecutive month when exports far exceeded imports although both grew by a healthy margin.

Highlights:

Total exports increased 5.5% in January to a record of $74.5 billion, following a 6% increase in December. A 1% decline in the value of the Canadian dollar to its U.S. counterpart in January also led to an increase in export value, StatCan said.
In volume terms, total exports rose 4.5% in January, following an increase of 2.6% in December.
The jump in exports was led by an over 12% jump in motor vehicles and parts, followed by a 4.8% increase in exports of energy products.

U.S. factory activity eased as tariffs threats spark accelerating costs

U.S. manufacturing activity expanded slightly in February for a second straight month after 26 months of contraction, although at a more cautious pace as price growth accelerated on the threat of new tariffs. The Institute for Supply Management reported that its purchasing managers’ index of manufacturing activity ticked down to 50.3 in February from 50.9 in January, slightly weaker than the 50.6 from consensus estimates. However, it was above the 50-mark that divides growth and contraction, the second time after more than two years below.

Highlights:

The report noted that demand eased in the month while production stabilized, and destaffing continued as companies experienced the first operational shock of the new Trump administration’s tariff policy.
“Price growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery stoppages and manufacturing inventory impacts,” said Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee.
Tariffs dominated write-in responses to ISM’s survey. “The incoming tariffs are causing our products to increase in price. Sweeping price increases are incoming from suppliers. Most are noting increases in labour costs … Inflationary pressures are a concern,” said one respondent from the machinery sector.

ECB cuts rates to guard stalled economy against tariff threats

The European Central Bank (ECB)cut interest rates to boost growth, with the region’s stalled economy facing twin shocks from Trump tariff threats and a sudden need to radically increase military spending. The ECB reduced its key interest rate to 2.5% from 2.75%, widening a gap in benchmark borrowing costs with the U.S. Federal Reserve. It was the sixth cut in seven meetings.

Highlights:

It has been a historic week for Europe’s economy, after Germany decided to spend as much as €1 trillion or more on defense and infrastructure, altering the outlook for economic growth and inflation across the continent.
The large spending package should bolster economic growth in Europe and push up inflation over time, which would limit the need for lower rates from the ECB.
The ECB lowered its forecast for eurozone growth, to 0.9% this year and 1.2% next year, while nudging up its forecast for inflation this year, to 2.3%.

^{1 S&P 500 Index CAD}
^{2 S&P/TSX Composite Index CAD}
^{3 Bloomberg Developed Markets ex N. America Large & Mid Cap Price Return Index CAD}
^{4 Bloomberg EM Large & Mid Cap Price Return Index CAD}

by Scotia Wealth Management - The Zukiwsky Group

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Market Watch: March 7, 2025

Highlights:

ECB cuts rates to guard stalled economy against tariff threats

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