July 2025 - The markets advance despite trade tensions

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

The S&P/TSX Composite Index advanced 1.7% in July. It was the third straight month of gains, with notable support from financials, technology and energy. Trade tensions between Canada and the United States escalated at the end of the period. President Trump announced a 35% tariff on some Canadian exports not covered by the United States-Mexico-Canada Agreement, with an effective date of August 1. This development increased short-term economic uncertainty and cast a pall over the stock market, although most bilateral trade is protected by the existing agreement. 

Bond yields rose in July, with the 10-year Government of Canada yield going from about 3.28% to 3.45% at the end of the month. Higher yields weighed on fixed income performance, causing the FTSE Canada Universe Index to decline by 0.74%. 

U.S. equities continued to rise in July. The S&P 500 ended the month at a new high, adding 2.2% in U.S. dollars and 3.6% in Canadian dollars. The performance was fuelled by the results of major tech companies, notably Microsoft and Meta, whose earnings benefitted from the growing adoption of artificial intelligence-related solutions. The Federal Reserve kept its key interest rate in the range of 4.25% to 4.50%. Two committee members voted in favour of an immediate cut, but the majority saw the need to stand pat amid continued uncertainty over inflation. Fed Chair Jerome Powell said a September rate cut was unlikely, signalling that the central bank would wait for further signs of a sustained economic slowdown before acting. 

Developed markets outside North America posted gains in local currencies in July, with the MSCI EAFE Index advancing 1.4%. That being said, the loonie’s appreciation erased the gains for Canadian investors, with the index ending the month down 0.1% in Canadian dollar. In the euro zone, the economy showed signs of slow growth, without any real momentum. The PMI indexes – economic indicators based on purchasing manager surveys that measure the level of manufacturing and services activity – suggested a timid recovery, especially in the manufacturing sector, which remains under pressure in Germany. The European Central Bank left its rates unchanged, with no clear indication of its intentions. Japan’s central bank also held rates steady, while acknowledging that inflation was more persistent than expected. The stock markets’ performance reflected this context of weak growth and stable monetary policies. 

Emerging markets rose 3.4% in July, in Canadian dollars and local currencies alike. The return was driven by a strong start to the month, as investors turned to emerging regions for diversification and more attractive valuations. Even so, some of the gains were erased at the end of the period under the combined effect of a stronger greenback and new trade tensions.  

China reported mixed economic data. Annual GDP growth in the first half of the year and industrial production in June exceeded expectations, but market sentiment was affected by the decline of the Caixin Manufacturing PMI, an economic indicator measuring the health of China’s manufacturing sector, which ended July at 49.5, indicating a contraction in activity. New export orders also remained weak, reflecting a more challenging external environment.