Oil surged, rates stuck, AI soared
A quick welcome to our new readers: here you’ll find our unfiltered take on the week’s market events that caught our attention. And if you haven’t already, give our weekly podcast, The Living Market a listen.
What happened to oil and natural gas this week?
The Middle East conflict has clearly escalated once more. Iran’s South Pars gas field and Qatar’s liquefied natural gas facilities are now part of the battlefield, and the rhetoric has followed. Trump openly warned of massive retaliation if attacks continue. Markets took note, with Brent crude oil briefly touching $118 per barrel. Iranian strikes have taken out roughly 17% of Qatar’s liquefied natural gas export capacity, with damage expected to last three to five years. Several key facilities that turn natural gas into liquid form were hit, removing about 12.8 million tons per year of supply and costing an estimated $20 billion annually in lost revenue. What initially looked like a short-term disruption is increasingly taking the shape of a multi-year supply shock. Canadian energy companies rallied all week because of the situation, providing a good buffer to portfolios.
How did the Bank of Canada and U.S. Federal Reserve react?
The Bank of Canada did exactly what was expected and held rates at 2.25%, but the tone tilted toward recognizing a slowing economy. Growth is weaker, the labour market remains soft, and domestic momentum is fading. At the same time, higher oil prices and disruptions in the Middle East are pushing inflation higher in the short term. That is the dilemma: this is not demand-driven inflation. It is a geopolitical supply shock. Increasing interest rates would effectively accelerate the slowdown, with higher energy prices already acting as a tax on consumers. The market is still pricing in rate hikes for Canada in 2026, but that looks aggressive to us.
The U.S. Federal Reserve (the Fed) also held its rate, with a relatively tight vote and projections still showing limited cuts ahead. Inflation expectations were revised higher, and Fed Chair Jerome Powell struck a more cautious tone. The result is a market that is slowly letting go of the idea of aggressive rate cuts in the U.S., even while rate increases are also unlikely.
Is AI growth still booming?
Micron, a memory and storage company, and one of the more important parts of the AI supply chain story, delivered a blowout quarter, with revenue nearly tripling year-over-year. It was driven by surging demand for memory tied to AI infrastructure. But even with that kind of growth, from an already very elevated base, the company said it can currently only meet roughly 50% of customer demand. In other words, results could have been materially greater if supply allowed it. Tight supply, strong pricing power and multi-year demand visibility is the story within all of these chip names these days. If anything, this reinforces the idea that the AI cycle is still in its early stages. When companies are still unable to meet demand after this kind of capacity expansion, it tells you the cycle has room to run.
How will the markets react?
Looking ahead, markets are being pulled between resilient fundamentals and an uncertain geopolitical backdrop. So far, the impact on markets remains relatively contained. But the longer the conflict drags on, the greater the risk that higher energy costs and tighter financial conditions will begin to erode that resilience. The good news is that the U.S. administration understands the economic and market risks. Political pressure is building for the Trump team to find an off-ramp, and there is a great incentive to do so. Markets can absorb headlines for a while, and history shows that when it comes to wars, the rebound rallies can be sudden and strong. Patience is therefore of the essence.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
