August 2026 – Higher oil prices revive inflationary pressures

Sources: Bank of Canada, Bloomberg Finance L.P.

The Canadian market returned 3.1% in August, for its fifth straight month of gains. 

The main contributors were the materials and information technology sectors, while the consumer-related sectors held the index back. After six months of near-zero growth, the Canadian economy rebounded in the second quarter with annualized growth of 3.3%, the fastest pace since 2023. With a jump in exports and solid domestic demand, the recovery ruled out a technical recession. Investors expect the Bank of Canada to hold its key interest rate at 2.25%. 

Even so, the United States’ decision to impose a new 50% tariff on US$20 billion of Canada’s exports, or about 5% of its exports to the United States, reignited trade tensions between the two countries and increased economic uncertainty. The measures were adopted after the trade negotiations between Washington and Ottawa broke down. They are relatively targeted in value terms but affect a number of sectors, such as dairy products, alcoholic beverages, apparel, sports equipment and some wood products. 

Canada promptly retaliated with counter-tariffs of equivalent value targeting 700 U.S. products, as well as a CAD 7.5-billion assistance package for domestic businesses and workers. This new escalation could put pressure on business costs and trade flows, while adding to the uncertainty surrounding Canada’s economic outlook. Finally, a new source of friction aggravated the already tense Canada-U.S. relations when President Trump announced on August 27 that he would change the name of Lake Ontario to “Lake America.” 

As for fixed income, higher yields weighed on Canadian bond prices. In this context, the FTSE Canada Index fell 0.2%. 

The U.S. market returned 1.5% in Canadian dollars versus 2.7% in U.S. dollars, as the depreciation of the greenback moderated gains for Canadian investors. Enthusiasm for artificial intelligence stocks remained strong despite their recent weakness, helping support the market. The information technology and energy sectors were the main drivers of the S&P 500, with NVIDIA’s quarterly results capping a strong earnings season. 

The technology sector recovered after its July correction, with semiconductor stocks rebounding and the software sector posting the biggest gains. 

The U.S. bond markets also received considerable attention. Expectations of a rate hike increased after the Fed Chair’s hawkish speech at Jackson Hole, and the spread between short-term and long-term yields narrowed. The markets are pricing in a more than 65% chance of a 25-basis-point hike at the September meeting. Moreover, the U.S. Treasury Department announced plans to increase its long-term bond buyback. 

International markets continued to advance in August on economic resilience and favourable corporate earnings, returning 0.8% in Canadian dollars, versus 1.4% in local currencies. 

International developed markets, however, posted broad-based gains, supported by strong second-quarter earnings. Japan’s TOPIX stood out with a 3.9% return in local currency, which coincided with a weaker yen. A more expansionary domestic fiscal policy contributed to strong returns across all Japanese sectors. 

Emerging markets rose 2.2% in Canadian dollars, versus 1.9% in local currencies, slightly outperforming developed markets. Their outperformance was due partly to the weak U.S. dollar. Strong quarterly results in major regions, led by the energy and technology sectors, also drove the advance. The Taiwan index, with its high concentration of AI-related and semiconductor stocks, stood out as one of the best performers in local currency. 

In the months to come, the markets will continue to be affected by energy price developments, geopolitical tensions, trade disputes and interest rate decisions by major central banks.