Commentary July 2025 – Past the First Speed Bump

Reblogged from Brintab

The quarter opened with the US initiation of tariffs against all major trading partners.  This led to major waves of panic around the globe and a real roller coaster for stock markets.  Thanks primarily to a cautious recent stance on our investments, generally speaking our clients only experienced a very modest portfolio decline for the quarter and as a bonus, if we drill down to look at our portfolios on a day-by-day basis, our roughly flat quarter was achieved without dramatic swings as the Trump-triggered waves spread through markets.

Ultimately negotiations surrounding those tariffs progressed through fits and starts and multiple announcements of kicking the can down the road two weeks here, 30 days there, and whatever was the flavour of the moment.  In some ways things got worse before they got better.  China countered US threats by countering to cut off rare-earth metal exports, a key component to, among other things, the permanent magnets that are in almost all of the electrical and electronic devices we use daily.

In Canada the tariff impact is being felt most acutely through its repercussions in the auto industry, which is largely centred around serving the US consumer market.  While US stock markets somewhat recovered, major US-serving sectors of the Canadian economy still feel like they are on life support.  Furthermore, the Canadian housing sector is already wallowing and not providing any alternative source of strength to the economy.

The US tariff shocks have been so severe that markets barely moved on the Israeli and later US attacks on Iran.  This is quite surprising.  Something that would normally trigger real alarm in the stock market got little more than a yawn, judging by price action.  This speaks to how much the US political volatility has somewhat numbed investors and the world-at-large to events that we would have formally found absolutely shocking!

Looking at the real economy, there was a surge of international goods trade this winter, attempting to get ahead of the tariffs.  We are now likely seeing the after effect, with warehouses all through the US stuffed with inventory and the real economy taking a breather.  When this sort of whipsaw behaviour happens, it usually takes at least a year to see where things are going to eventually restabilize.  Layering onto this the constant new political announcements and shifting policies south of the border means reading the tea leaves is not straightforward.  Although we are also faced with a new federal government in Canada, the reality is that its changes seem pretty benign compared to the constant political storms south of the border.

Meanwhile, as tariff negotiations unfold, the “Big Beautiful [budget] Bill” has just worked its way through US Congress.  From the perspective of Canadian investors, a major relief came when Treasury Secretary, Scott Bessent asked Congress to remove from the bill the Section 899 provisions that would impose punitive withholding taxes on the US investments for investors from countries that, in the US government’s view, have tax regimes unfair to US companies.  That saved us having to liquidate and substantially reposition our investments away from US markets.

With Section 899 worries out of the way, we could return to the simplest response to the rest of this political storm: just look for great businesses that in the long term are likely to survive and thrive despite the changing names and policies of the government du jour.  Now that the wild ride of April is behind us, that is what we are doing.

Bonds and Interest Rates

When we look at the recent actions of central bankers, we note that around the world they are watching the impacts on tariff negotiations to see how much price inflation comes from the tariffs.  Once it is clear that the price inflation is modest (which I am sure it will be) then central banks will start lowering short term rates to cope with another broad economic challenge: unemployment problems.  Those problems are more evident in Canada than in the USA, but signs of unemployment problems are starting to appear south of the border too.  The Bank of Canada and the US Federal Reserve may act during this fall to drop short term interest rates, on the other hand long-term rates are probably not yet ready to follow the lowering trend in short term rates.

Fig. 1: Bonds-Med. term Cdn Gov’t-purple, Cdn Corp-green, High Yield-red, Long Term US-black – 2 years – TradingView

In the USA, the 10-year Treasury bond has been fluttering in the 4-5% range for over a year now while in Canada the 10-year treasury has been bouncing around in the 3.0-3.5% zone.  The challenge to get yields lower (and bond prices higher) is different in Canada vs the USA.  Here in Canada the government is coping with the housing affordability problem and it’s hard to drop interest rates to stimulate the broad economy without reigniting strong home price acceleration.  In the USA the challenge is to convince Treasury bond holders that the government will have the money to pay them back.  The US deficit is running wild and every time the government cuts costs they just turn around and drop tax rates, thus making no headway on balancing their budget.  While both governments have tricky challenges ahead, I feel the Canadian problems are more easily solved than the US ones.  Hence, I expect to see more decline in long term government interest rates (and rise in bond prices) in Canada than in the USA.  That said, we will still hold a significant position in US long bonds, primarily because there is more liquid access to very long-term Treasury bonds in the USA than there is in Canada.

Currencies

This quarter a crowd of bond investors and others moved currency markets.  In April I mentioned the risk of capital flight from the US pushing their currency lower and US bond yields higher as bond investors sell and move their money elsewhere.  The bond market is absolutely massive (far bigger than the stock market) and the impact of these bond-buying shifts around the world can move currencies dramatically.  In fact, that impact did happen to some extent this spring.  Part of the challenge in the US 10-year bonds finding a lower yield (which would have happened if buyers had bid up the bond prices) came from buyer weakness as some bond holders chose to do their investing elsewhere.  The market for bonds issued by Germany, Canada, and other countries saw rising appeal while US government bonds languished.  The effect spilled over into the currency market so the US Dollar weakened this spring against the CAD and even more so against the Euro.  In Figure 2 below you can see the slipping of the USD since the beginning of 2025 against the CAD (in purple) and also against the US Dollar index (in green), which is heavily focused on the Euro.

Fig. 2: US Dollar Index-green and USD vs CAD-purple – 2 years – TradingView

This brought about the resurgence of the Canadian Dollar back above 70 US cents from its winter plummet into the upper 60s.  As the Canadian economy weakens thanks to the tariffs, and Canadian interest rates fall, I doubt the CAD will rise above 75 cents.  It’s recent value around the 73-74 cent mark is likely the best we will see for a while.

Stock Markets

While the Trump tariff announcements at the beginning of the quarter really gave stock markets a punch in the gut, the White House followed by mostly walking back from the threatened rates, issuing delays on effective dates, and giving various temporary exemptions.  The result was that the almost 20% decline peak-to-trough in stock markets was largely recovered by the end of the quarter.  At the end of the quarter the US S&P500 stock index was only down about 3% from its peak, in Canadian Dollar terms.

Fig. 3: Stocks: US-black, Can-purple, Jpn-red, UK-yellow, Germany-green – 2 yrs – Trading View

Nonetheless, we still have issues ahead.  First of all, we are still far from clarity on the outcome of tariff negotiations.  Secondly, the ramifications on the real economy are just beginning to trickle through.  Thirdly, these agreements with President Trump are really nothing more than handshakes since they are not Congress approved agreements.  This means they can be disregarded at the snap of the fingers if they no longer resonate with the President.  It would not surprise me if the President enters into agreements this summer just strong enough to stop the stock market from collapsing and then once the dust has settled begins a second round of “they’re still ripping us off” tariff negotiations if he thinks the markets can handle it.  Hence an important tactic may be to look at parts of the economy that seem not to be in the crosshairs of these geopolitical tensions.

Respectfully submitted,

Paul Fettes, CFA, CFP, Chief Executive Officer, Brintab Corp.