Update from RJMwealth: US-Iran, Oil, SpaceX & Interest Rate

From geopolitical developments affecting energy to the historic IPO of SpaceEx, which is reshaping market dynamics, here's some commentary from our Portfolio manager Partners (RBC, Dynamic) to help summarize the events so far this week:

U.S. and Iran reach deal to reopen Hormuz

The U.S. and Iran have reached an interim peace agreement to reopen the Strait of Hormuz and end the 15-week war. The two sides are expected to formally meet in Switzerland on June 19 to sign the agreement.

Here’s what we know so far:

What the agreement means:

Strait of Hormuz reopening: The U.S. has agreed to lift its naval blockade, and Iran has committed to reopening the Strait toll-free.
Ceasefire: Both sides agreed to an end to military operations.
Nuclear freeze: Iran has agreed to temporarily freeze uranium enrichment and halt facility expansion, initiating a 60-day window for negotiation.
Sanctions relief: In exchange for the nuclear freeze, the U.S. is expected to unfreeze $25B in Iranian assets and allow for the export of Iranian crude and petrochemicals.
Immediate Market Relief: This tentative breakthrough has taken an "active conflict premium" out of the markets. Oil prices have slid (Brent to $83 and WTI to $80), causing a sharp drop in 1-year U.S. inflation. Equity markets responded with relief, lifting the S&P 500 by roughly 1.9% as inflation and growth risks subsided.

Remaining risks

The nuclear issue is unresolved: The current agreement is a temporary freeze, and the 60-day talks could fail, pushing the countries back into conflict.
Physical shipping won’t normalize overnight: The operational reopening will be gradual. Chief strategists note it is unclear whether the Strait can return to "normal" operations in a reasonable timeframe; insurers need to get back on board, and there could be last-minute demands from Iran.
It’s not yet a sure thing: The deal exists as a memorandum of understanding (MoU). The final signing will be on Friday and there could be a breakdown before that point. The deal has also faced criticism from Israel.

Oil outlook and the opportunity

Brent is at $83 and WTI has fallen back down to $80 this morning as the market has priced out the “active conflict premium”. It’s unlikely that prices will snap back to pre-war $60 levels. The war has significantly depleted inventories and disrupted supply chains. Infrastructure has been destroyed, and Gulf nations are not in a rush to rebuild (partly because they want the U.S. to pay, partly because it could just very well get destroyed again). Fully restoring physical traffic through the Strait will take time too.

The fallout of all of this is that there is now a renewed focus on stable, safe, and reliable jurisdictions. Energy buyers want to know that supply won’t get disrupted and will be willing to pay for that safety going forward, making Canadian producers appealing. We have been strategically adding Canadian exposure for the last year.

Canadian producers are benefiting immensely from this free cash flow windfall, they can reduce debt even faster than before. They also have capacity, and they benefit from high quality long duration assets (i.e. they don’t need spend money to find more oil).

Lastly, foreign capital is starting to acknowledge the position Canada is in and we’re seeing foreign flows to a degree that we haven’t seen in quite some time. All of this creates a favourable backdrop for Canadian producers.

SpaceX’s historic debut + Apotex marks Canada’s largest since 2021

SpaceX officially went public on Friday, rising 19% and surpassing a $2T valuation. It cemented its place as the largest IPO in history and signalled that investors are willing to pay a high price for visionary mega-cap growth. Eyes are now on what could be the next two mega-cap IPOs: Anthropic (expected October) and OpenAI (expected 2027).

Overshadowed by the SpaceX IPO, Canadian pharmaceutical giant Apotex Health made its debut on June 10. The stock traded up 12% on its first day of trading. The listing of Apotex provides a rare, growth-oriented pharma option for Canadian portfolios which have historically been starved of health care names. Apotex specializes in the research, development, manufacturing, and distribution of affordable, high-quality generic and biosimilar medications. It’s the largest pharma company in Canada and fills one in five prescriptions nationally.

Markets remain positive on growth prospects for these new businesses.

European Central Bank hikes – BoC, Fed, and Market Expectations

The ECB made its first rate hike since 2023, driven by the energy supply shock. The ECB’s only mandate is price stability and inflation is above its 2% target, reaching 3.2% in May. Hiking now is a step towards avoiding a repeat of the entrenched inflation of 2022. However, it’s unlikely Canada or the U.S. will follow suit immediately. Crucially, Europe is a net importer of energy, while Canada and the U.S. have energy independence, making their economies more resilient to the energy shock.

Following the interim peace agreement between the U.S. and Iran, the domestic rate path faces competing forces:

Hotter Inflation vs. Futures Pricing: Following last week’s U.S. inflation report—which saw headline CPI climb to 4.2% year-over-year (up from 2.4% pre-war) and core CPI hit 2.9%—the futures market has fully priced in a quarter-point Federal Reserve rate hike by the December 9th meeting.
The Fed Wildcard: This Wednesday marks a crucial FOMC meeting, bringing updated economic forecasts. Crucially, it will be the first meeting chaired by the newly appointed Kevin Warsh, who replaced Jerome Powell last month. His arrival brings structural uncertainty regarding Fed transparency, forward guidance, and the future of the "dot plot."
Why a December Hike Isn't a Done Deal: Despite the futures market's conviction, several disinflationary data points support a less hawkish posture. Crude prices have peaked and remain well below $100, U.S. labor costs are moderating, and a firmer U.S. dollar is helping mitigate import prices.
The Bottom Line: Market sentiment shifts rapidly. Just three months ago, the futures market was fully priced for a rate cut by the end of the year. While the Bank of Canada and the Fed are expected to hold in the near term, the fully priced-in December hike may not be as certain as the market believes.

Markets continue to be volatile and throw new factors at us regularly. Our focus on diversification and active management remain paramount to navigating the changing environment.

Please let us know if you have any questions. We look forward to connecting with you this summer.

Your Partners at RJMwealth