TSX Outperforms|Oil Shock, BoC on Hold

Oil Shock & the TSX Edge

Canada's main stock index ended the week slightly lower — and yet strategists are calling it the best-positioned market in the developed world. That contradiction is not a mistake. It is the story of this moment.

The US-Israeli war with Iran has sent oil above $104 a barrel on the Brent benchmark. For most equity markets, that is a tax on corporate margins and a weight on consumer spending. For Canada, a net energy exporter, the same price surge delivers a cushion. Export revenues rise. The fiscal position strengthens. The pain is unevenly distributed, and Canada lands on the better side of the ledger.

That asymmetry is now shaping the Bank of Canada's calculus. All 41 economists in a Reuters poll conducted April 21 to 24 expect the BoC to hold its overnight rate at 2.25% on April 29. More than 80% see no change through the rest of the year. March inflation came in at 2.4%, still within the central bank's 1-to-3% target band. Governor Tiff Macklem said last week that a rise in short-term inflation expectations should not trigger an immediate policy response. The message is patience.

That patience creates a deliberate divergence. The Federal Reserve faces a harder set of choices — higher inflation from oil, a labor market that is still tight, and political pressure that has not fully eased after the Justice Department closed its probe into Jerome Powell on Friday. The Fed is widely expected to hold, but the ceiling on its flexibility is lower. Canada has more room to wait. Desjardins chief economist Jimmy Jean forecasts the S&P/TSX Composite to return 12.5% in 2026, versus 9.1% for the S&P 500. That 350-basis-point gap is not noise. It reflects a structural tilt: energy revenues, a weaker Canadian dollar that boosts export competitiveness, and a central bank that has the luxury of watching.

The TSX rebounded more than 1,000 points in April. Retail sales rose 0.7% in February, beating expectations, with gains across seven of nine subsectors. The Canadian dollar steadied at 73.18 cents US. These are not rally signals in isolation — they are confirmation that domestic demand has not broken down under the weight of the trade dispute and the energy shock. But Jean's own range tells the story of the risk: the TSX could fall 5% or rise 18% in 2026. The gap between those outcomes is not random. It closes or widens based on one variable: how long oil stays elevated.

Enbridge & the Energy Card

The same oil shock that is complicating monetary policy is also handing Canada a negotiating instrument it has not used this directly in a generation.

On Friday, the federal government approved Enbridge's Sunrise Expansion Program — a C$4 billion expansion of the Westcoast pipeline system in British Columbia. The project adds 300 million cubic feet per day of natural gas transportation capacity. Construction begins in July. The in-service date is late 2028. The government expects the project to contribute more than C$3 billion to Canada's economy and employ approximately 2,500 workers, including from Indigenous communities.

The timing is not coincidental. The USMCA — the free trade agreement between Canada, the United States, and Mexico — is up for renegotiation this summer. Canada's natural resources minister said explicitly this week that the energy sector will be used as leverage in those talks. Prime Minister Mark Carney has publicly accused the US of violating the existing trade deal. He is simultaneously forming a new group specifically tasked with managing the Trump administration's trade pressure.

Trump offered a separate signal this week: immediate tariff relief for Canadian aluminum and steel companies that commit to expanding operations in the United States. The offer is a wedge — it targets individual companies rather than lifting sectoral tariffs, which means Canada cannot claim a clean win. Carney did not take the bait. He is holding the energy card instead.

The logic of that position is this: Canada produces natural gas that flows to LNG export terminals. Global demand for LNG has surged since the Iran war disrupted Middle Eastern supply chains. An Enbridge pipeline expansion is not just domestic infrastructure — it is supply-chain positioning in a world where energy security has become geopolitical currency. Carney's approval of Sunrise is a signal to Washington that Canada is willing to accelerate energy development on its own terms, not as a concession. Coastal First Nations leaders flew to Calgary this week to warn pipeline investors of legal risks — a reminder that the approval is a starting line, not a finish.

The conditional path from here runs through the USMCA deadline. If negotiations reach a functional framework before July 1, Canadian energy and manufacturing sectors get a clearer runway. If talks stall, the energy leverage play becomes more adversarial — and the companies caught between the two governments, the aluminum and steel producers weighing Trump's relief offer, face a harder choice.

The Hinge Variable

Two threads are running in parallel through Canadian markets right now, and they are both pulled by the same underlying tension.

Thread one: the oil price. If the Strait of Hormuz remains disrupted and structural damage to Iranian production infrastructure persists longer than markets have priced in, the TSX's energy advantage compounds. The BoC stays patient. The Canadian dollar remains competitive. Commodity-linked equities hold their premium. But if a ceasefire holds and oil reverses sharply toward the $80 range, the energy cushion disappears. The same week's data that showed retail sales beating expectations also showed energy sector weakness dragging the TSX lower on Friday. The sensitivity is real in both directions.

Thread two: the USMCA clock. Canada's GDP is forecast to grow 1.2% in 2026, down from 1.7% in 2025. BMO chief economist Douglas Porter said this week that trade will continue to be a drag on the Canadian economy once energy prices normalize. Mortgage arrears at Canadian banks have surged 89% from record lows — not a crisis, but a signal that the consumer is carrying weight. The labor market is expected to remain choppy. Those numbers do not support aggressive risk-taking. They support patience and selectivity.

The weight of evidence points toward the TSX continuing to outperform US equities through mid-year — but that judgment holds only if oil does not collapse before the USMCA framework is resolved. If oil retreats fast and trade talks stall simultaneously, the two props under Canada's relative strength get pulled at once, and the 12.5% return target becomes a ceiling rather than a base case. The recovery scenario in that environment leans on domestic demand — retail sales, housing stabilization, and the infrastructure spending that the Enbridge approval represents — but that recovery would be slower and more uneven.

The two benchmarks to check next week: the Bank of Canada's rate decision on April 29, and whether Carney's trade group produces any signal on the USMCA timeline before the Friday close. If the BoC statement is more hawkish than the poll consensus, that would be the first indication that the patience narrative is cracking. If USMCA language softens in either direction, the energy leverage thesis gets tested immediately.