In Q2 of 2025, financial markets were shaped by three major developments:

1. President Trump’s imposition of punitive tariffs on “Liberation Day,” which caused market volatility before a rebound following his shift to bilateral negotiations.
2. Rising concerns over the U.S. federal deficit and the return of bond vigilantes, who drove up yields by selling government bonds in protest of what they see as excessive spending, indirectly pressuring the administration to reconsider its inflationary policies.
3. An escalating conflict in the Middle East, punctuated by U.S. airstrikes on Iranian nuclear sites. Although oil and gas prices were briefly affected, broader markets remained relatively stable due to OPEC’s spare production capacity, though concerns linger about regional instability and its impact on key transit routes heading into late 2025 and beyond.

Markets in the latter half of 2025 are expected to be shaped by three pivotal trends:

1. A shift toward protectionism: Tariffs have emerged as America’s primary economic tool to boost domestic production and strategic independence, though trade negotiations, particularly with China, remain tense and unresolved.
2. Persistent inflation risks: Inflation concerns are mounting due to delayed trade deals, expansive tax cuts, and surging U.S. debt, with interest payments now eclipsing defense spending. Bond vigilantes continue to pressure fiscal discipline by driving up yields, limiting the Federal Reserve’s ability to ease economic strain.
3. Diminishing U.S. exceptionalism: Confidence in the U.S. dollar has faltered amid policy instability, prompting global investors to diversify into more stable and attractive markets like European and Japanese equities, which are benefiting from regional reforms, rising investment, and enhanced competitiveness.

Canada’s economic outlook remains mixed, marked by rising unemployment, shaky housing markets, and declining productivity due to weak investment in innovation, compounded by slowing population growth as immigration rates fall.

Despite these headwinds, several tailwinds offer cautious optimism:

1. Consumer spending remains resilient,
2. Canada enjoys the lowest U.S. tariff rate among major partners thanks to CUSMA exemptions, and a trade deal with the U.S. is anticipated by summer’s end.
3. Government initiatives, including Bill C-5 to remove internal trade barriers and fast-track national projects, along with a planned increase in defense spending, aim to stimulate growth.
4. The Bank of Canada has room for further monetary easing, with future rate decisions hinging on employment, spending, and inflation metrics—which, as of May, remain relatively stable at 1.7%.

Amid market uncertainty, diversification and disciplined risk management are viewed as critical for investors.

If you would like to discuss your portfolio, please connect directly with your investment advisor. 
 

Disclaimer

I, Theresa Shutt, have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone and may not reflect the views of Harbourfront Wealth Management Inc. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this should be viewed as a reflection of my informed opinions rather than analyses produced by Harbourfront Wealth Management Inc.