by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with takeaways from the latest escalation in US-Canada trade friction, before turning to recent geopolitical developments between the US and Iran. We then cover Treasury Secretary Bessent’s announced intent to intervene in bond and currency markets, along with the EU’s push for closer ties with Canada. As always, we include a summary of recent domestic and international economic data.

US-Canada Trade War: The US-Canada trade dispute escalated on Tuesday as both countries exchanged new trade restrictions. Canada moved first, imposing tariffs on US goods in response to duties that Washington had placed on Canadian imports two weeks earlier. The United States then threatened to block sales of its military aircraft and announced it was considering restrictions on certain dairy products and alcoholic beverages. That said, although tensions are rising, there are still few signs that this will have an impact on market momentum.

• The president’s latest actions come amid heightened scrutiny of the US-Canada relationship, as he seeks to realign bilateral terms to better serve American interests. Earlier this week, he questioned the fairness of the Canadian exchange rate, characterizing it as imbalanced. He has also suggested that Bombardier may need to start building more of its jets in the US or risk losing market access to government contracts. The remarks show that US grievances with Canada are not solely based on trade.
• Prime Minister Mark Carney has responded to US actions by acknowledging that the trade dispute will probably hurt Canada’s economy, but he is also pushing for alternative paths forward. His administration is reportedly exploring new free trade arrangements, possibly with the US and others, while accelerating infrastructure spending nationwide. While these steps are unlikely to resolve the issue in the long run, they are designed to soften the blow in the near term.
• The measures are unlikely to materially affect either economy, but the political fallout could be greater. Canada’s tariffs may pressure US policymakers ahead of the midterms, particularly in swing states such as Maine and Wisconsin, while US tariffs target manufacturing hubs in Ontario, New Brunswick, and Quebec. Canada’s retaliation could modestly weigh on the US economy, while US tariffs are likely to be a larger drag on Canadian growth. Even so, they are not expected to push Canada into recession.
• While the latest measures are unwelcome, their immediate market impact is likely to be limited because most US-Canada trade remains governed by the USMCA. The more important question is whether the dispute will spill over into other trade relationships, particularly as the United States prepares for talks with China. A broader rise in trade tensions could add to market volatility, but there is currently little evidence that this dispute is spreading beyond the bilateral relationship.

Iran Escalation: The conflict between the US and Iran has flared up once again, with both sides escalating retaliatory strikes. The US has launched missile attacks on Iranian oil tankers, while Tehran has responded by hitting US military positions in Jordan. The latest escalation comes amid a surge in Chinese oil purchases, fueling renewed concerns over supply-demand imbalances. While the heightened tensions could weigh on risk sentiment in the near term, little evidence remains to suggest that they pose a lasting threat to equity markets.

• The recent spat comes as the two sides fight for control over the strait. This renewed conflict has reversed much of the progress made in securing safe passage through the waterway, though many vessels still manage to transit by turning off their transponders. However, both countries have now begun targeting each other’s oil tankers, complicating their ability to profit from sales and rendering the strait increasingly dangerous for maritime trade.
• China’s pickup in purchases has heightened concerns over global oil supply. Until recently, China had slowed its buying and drawn down existing inventories, which helped ease upward pressure on prices. However, that trend reversed this month as oil shipments rose to 10 million barrels per day, up from the lows of 6 million barrels per day earlier this summer. This resurgence in buying appears to be driven less by broad end-user demand and more by Chinese refiners moving to capitalize on attractive refining margins.
• Nevertheless, while oil prices are likely to remain elevated, there are still encouraging signs that consumer spending remains resilient. Much of this sustainability stems from households’ access to available credit. In July, the increase in nonrevolving credit was the largest in three years; meanwhile, revolving credit growth slowed from the previous month but still posted a gain. This reliance on credit has helped sustain consumer purchasing power even as inflation has outpaced wage growth.
• The rise in oil prices, driven by conflict involving Iran and China’s resumption of purchases, remains a key economic concern. However, higher energy costs alone are unlikely to derail household spending. As long as geopolitical tensions stay relatively contained, markets should recover from temporary drops in sentiment. For risk-averse investors, value stocks offer attractive potential due to their stronger fundamentals and lower volatility profile.

Bessent Steps In: US Treasury Secretary Scott Bessent made clear his readiness to intervene in order to prevent markets from spiraling out of control. On Tuesday, he stated that he is prepared to step into both bond and currency markets to deter speculators from triggering a sell-off. His actions come amid growing investor anxiety over rising fiscal spending in both the US and Japan. Collectively, these moves reinforce the perception that the government is becoming increasingly interventionist in the economy.

EU-Canada Alliance: The European Union and Canada are working to deepen security and trade ties as both look to reduce their economic dependence on China and the United States. European Commission President Ursula von der Leyen is expected to outline these plans during her State of the Union address on September 16, with Canadian Prime Minister Mark Carney in attendance. While there has been ongoing speculation about Canada establishing an EU-style partnership with the bloc, the practical mechanics of such a framework remain unclear.

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