September 2026 – Rising bond yields weigh on markets

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

The Canadian market fell 2.6% in September, snapping a five-month winning streak. 

The decline came during a volatile month marked by rising global bond yields, a Federal Reserve rate hike and escalating trade tensions between Canada and the United States. Lower precious metals prices weighed on mining stocks. All the S&P/TSX sectors declined during the month, except information technology. 

Canada’s gross domestic product was unchanged in July, after rising for three consecutive months. According to Statistics Canada’s preliminary estimate, GDP was up 0.2% in August relative to July. At the end of September, investors expected the Bank of Canada to increase its key rate by 25 basis points in December, whereas most economists thought the rate would remain unchanged. As for fixed income, the FTSE Canada Index was down 1.2%. 

The U.S. market returned 2.1% in Canadian dollars versus a decline of 0.4% in local currency, as a stronger greenback helped Canadian investors post a gain. Even so, strength in technology stocks masked broad market weakness during the month. The S&P 500 Equal Weight Index, which gives each company the same weight, was down 4.8% in U.S. dollars. With a heavy weighting of tech giants, the S&P 500 presented a more positive picture of the market’s overall performance.  

The Federal Reserve raised its key rate for the first time since 2023, taking it to a range of 3.75% to 4.00% and signalling that more hikes could follow. Rising crude oil and diesel prices stoked inflation fears and pushed bond yields higher.  

At month-end, however, inflation data provided some respite. The PCE Price Index, which measures the prices of goods and services consumed by households and is the Fed’s favoured inflation gauge, rose by 3.4% year over year in August versus expectations of a 3.7% increase. This result reduced expectations of another rate hike in October. 

Meanwhile, GDP growth in the second quarter was revised upward to 2.2% because of consumer spending and investment related to artificial intelligence.

International markets fell 0.7% in Canadian dollars versus a 1.7% decline in local currencies. European equities recorded their first monthly decline in six months, held back by higher oil prices and rising bond yields. 

The energy shock has pushed up inflation in the euro zone. In September, year-over-year inflation reached 3.3% in Germany, 3.4% in France and 4.1% in Italy.  

In the United Kingdom, the FTSE 100 suffered its biggest monthly decline since March, despite an upward revision to second-quarter growth. In Japan, the stock market ended the month almost unchanged. The Bank of Japan raised its key interest rate to 1.25% in response to inflationary pressures related to the energy shock and the weak yen.

Under the weight of rising U.S. interest rates, emerging market equities returned 1.9% in Canadian dollars versus a slight decline of 0.3% in local currencies.   

India stood out on the downside, with the Nifty 50 Index shedding 6.1% in local currency as foreign investors pulled US$2.7 billion out of the market. China’s main stock indexes also fell sharply in September: The Shanghai Composite Index was down 3.6% and the Shenzhen Composite Index retreated 8.0% in local currency. The new stimulus measures announced by the Chinese authorities failed to reassure investors concerned about continued weakness in China’s household and business spending. 

In contrast, Taiwan and South Korea saw their main equity indexes rise during the month. In Taiwan, technology stocks and semiconductor manufacturers were buoyed by strong demand related to artificial intelligence. 

The conflict in the Middle East, energy prices, inflation data and interest rate decisions by the major central banks will continue to drive the markets in the months to come.