Middle East Tensions Weigh on Canadian Stocks as Loonie Weakens Despite Oil Rally

Toronto | EcoPulse24

Canadian financial markets retreated on Thursday as escalating tensions in the Middle East and surging oil prices fueled global risk aversion, prompting investors to reduce exposure to equities and shift toward safer assets. The developments also weighed on the Canadian dollar, which weakened against the US currency despite the traditional support provided by rising energy prices.

The S&P/TSX Composite Index fell 0.8% to close at 32,841, as investors reacted to growing concerns over potential disruptions to global trade and energy supply routes following heightened threats to shipping through the Strait of Hormuz, one of the world’s most critical oil transit chokepoints.

The geopolitical escalation has driven oil prices sharply higher, with WTI crude approaching the $100 per barrel level, boosting shares of Canadian energy companies and providing some support to the resource-heavy Toronto market. However, gains in the energy sector were not enough to offset broader market weakness.

Selling pressure was particularly evident in the financial and technology sectors, where investors moved to reduce risk exposure. Shares of major companies such as Shopify declined 2.3%, while Canadian banking stocks also faced notable selling as investors reassessed the potential economic impact of rising geopolitical risks and higher energy costs.

Mining companies also posted losses during the session. Shares of major gold producers Agnico Eagle, Barrick Gold, and Wheaton Precious Metals fell between 1.6% and 1.8%, as bullion prices faced mixed pressures from a strengthening US dollar and rising US Treasury yields.

In currency markets, the Canadian dollar weakened beyond 1.36 per US dollar, as strong demand for the greenback as a global safe-haven asset overshadowed the positive impact of higher oil prices on Canada’s commodity-linked currency.

The loonie is now caught in a tug-of-war between surging energy prices, which typically support the Canadian economy, and a broader flight to safety that has strengthened the US dollar across global markets.

Domestic economic indicators have also shown mixed signals. Canada’s unemployment rate rose to 6.8% in February, as labor force growth outpaced modest job gains, highlighting a cooling labor market despite relatively resilient economic activity.

Despite the softer labor data, financial markets widely expect the Bank of Canada to maintain its policy interest rate at 2.25% during its upcoming March 18 meeting, as policymakers seek to balance stable inflation near 2.4% with rising risks of global supply disruptions triggered by geopolitical tensions.

EcoPulse24 Analysis

The recent performance of Canadian markets highlights the complex balance between supportive commodity prices and rising global uncertainty. While higher oil prices generally benefit Canada’s energy-driven economy, escalating geopolitical tensions and stronger demand for safe-haven assets are currently dominating market sentiment. If energy disruptions intensify or geopolitical risks persist, volatility could remain elevated across Canadian equities and currency markets, even as the energy sector continues to receive structural support from higher crude prices.