Is Tariff Volatility Another New Normal?

Transcript

Hello everyone and welcome to market weekend review for the week ending April 11th, 2025. My name is Bachan Linn. I'm a senior investment strategist and head of Canadian strategy here at Russell Investments. On this week's edition of Market Weekend Review, we're going to be discussing three major topics. First, the ongoing equity market volatility and its link to the trade standoff. Second, why we think the Bank of Canada will likely continue cutting interest rates. And finally, the recent momentum in gold prices. So, let's start with the equity market volatility because this week once again has been a week of sharp equity market volatility. Sometimes this week we've seen very large even intraday swings where the equity markets might at one point be up during part of a trading day and then be sharply lower during a different part of the trading day. And I think a lot of this has to do with the fastpaced and ever dynamic tariff situation that's occurring. So for example, at the start of this week, we saw some more adverse impacts on the tariff side where both the Chinese government and the US government announced that they would be raising the tariff rate they impose on tariffs on goods imported from the other country. And we know that tariffs generally speaking would boost prices. And so that was interpreted in an adverse light by the markets. But because of some of those market anxieties, we saw that equity markets have become deeply oversold. In fact, as of Tuesday, April 8th of this week, we actually saw equity markets reach a 98th percentile oversold reading based on our proprietary sentiment indicator. Which means that equity markets as of the middle of this week became more oversold than they ever have been in 98% of a time in history dating back to 1997. And so when you do see the markets become very oversold, it can create conditions where sometimes even a slight piece of good news might be enough to induce a bounceback. And on Wednesday, we did see a piece of good news come in the form of President Trump announcing a pause for 90 days on tariffs on several key trading partners, including Vietnam, Cambodia, European Union, etc. But even though markets saw their very sharp rally on Wednesday, we saw the equity market indices increase significantly. That tone quickly changed once again on Thursday. Even though on Thursday we got some more encouraging news in the form of US inflation coming in softer than expectations. And I think at the end of the day, part of the reason we are seeing this ongoing volatility is because even with the pause in tariffs on several trading partners, there's still a lot of unanswered questions as to what the ultimate and final tariff rate will be on these various countries and how those tariff rates could impact the US economy and the global economy. So, as long as we continue to see this trade policy uncertainty, it's possible that we might see further volatility in the markets. But I think this is a good reminder for everyone that volatility is actually not something that we as investors should be afraid of. In fact, sometimes volatility can create opportunity as long as we remain disciplined and stay focused on our strategic plan. Next, I want to talk about the Bank of Canada. They're meeting once again next week. And I think there's a pretty high likelihood that they're going to continue to cut interest rates. After all, we know the Canadian labor market has remained very fragile with the Canadian economy actually losing 33,000 jobs in the month of March. And although some people would say that yes, the tariffs could create a one-time boost to price levels, I think the Bank of Canada is going to be more focused on the potential medium-term impact. And over the medium-term, I think the Bank of Canada has to pay more attention to the growth side of the equation because with that starting point of fragility in the Canadian economy, there's a high probability that we might see a recession in Canada over the next 12 months. We think that the recession probability might be around 65%. And if the Canadian economy were to tip into recession, that could create downward price pressures over the medium term. And so I think the Bank of Canada is going to be more focused on the risk of price pressures potentially undershooting target over the medium-term rather than the potential for a one-time boost in initial prices as a result of these tariffs and retaliatory tariffs being imposed on Canada. And so that's why I continue to expect the Bank of Canada most likely will cut rates once again at their meeting next week. But we're going to get another inflation report right before the Bank of Canada meeting and that could also influence their decision. Finally, we have been seeing continued momentum in gold prices where gold prices continue to make new highs and part of this is because investors have become more anxious about the uncertainty that exists in the global economy. Now, it's possible that momentum could continue, but a lot of traditional valuation models would suggest that gold prices perhaps have become somewhat overvalued. So from our perspective, we think that sticking close to a strategic asset allocation instead of chasing into the momentum in gold might perhaps be the best course of action. Thanks for tuning in. Hi, I'm Sophie Antelbe, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

In the latest video update:

Tariff standoff continues
Bank of Canada’s next move
Going for gold?

In the latest edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, discusses the latest developments in the ongoing U.S. trade tensions. He also shares key considerations impacting potential rate cuts by the Bank of Canada (BoC), and queries whether the momentum in gold prices can last.

Tariff standoff continues

Markets experienced a turbulent week, marked by sharp intra-day swings in equity markets. Both China and the U.S. raised tariffs on each other’s goods, intensifying market anxiety. As a result, Lin notes that markets became extremely oversold, “As of Tuesday, we saw equity markets at the 98th percentile for oversold conditions, based on our proprietary sentiment indicator.”

He adds that such oversold conditions can create an environment where even a small piece of good news can prompt a sharp market rebound. This played out on Wednesday, when U.S. President Donald Trump announced a temporary pause on tariffs for certain trading partners, sparking a surge in equity prices.

However, the rally was short-lived. Despite Thursday’s better-than-expected U.S. inflation data, market volatility persisted, which Lin attributes to continued uncertainty around tariff levels and the broader implications for the global economy.

“Our view is that as long as trade policy uncertainty remains high, volatility will likely continue,” he explains. “But volatility isn’t something investors should fear—it can create opportunity if approached with discipline and a focus on long-term objectives.”

BoC next move

Shifting to the Canadian economy, Lin says the BoC is likely to continue lowering interest rates when it meets next week. He emphasizes that the Canadian labor market remains fragile, with 33,000 jobs lost in March alone.

This weakness, coupled with potential medium-term effects from U.S. tariffs, raises recession risks. Lin highlights that the estimated probability of a Canadian recession over the next 12 months is at around 65%.

He adds that the BoC will likely be more concerned about the potential for inflation to undershoot its target in the medium term and the overall health of the Canadian economy, than short-term price increases driven by U.S. tariffs.

Going for gold?

Lin concludes with commentary on gold prices, which have recently hit new highs. “Investor anxiety around global economic uncertainty has helped fuel the rally,” he says.

However, he cautions that traditional valuation models suggest gold may be overvalued at current levels. Rather than chasing momentum, he argues investors are better served by sticking to their strategic asset allocation.