July 2026 market update

Introduction

Global equity markets finished largely unchanged over the month of July. Investor sentiment was relatively muted as U.S.-Iran tensions escalated, resulting in fresh attacks and bringing shipping through the Strait of Hormuz to an effective standstill. Oil prices surged higher over the month, reigniting concerns about inflation. As reported in July, inflationary pressures subsided in June but are expected to be reported as having risen again in July as the global supply of oil was hindered by the Mideast conflict.

Major central banks, including the Bank of Canada (BoC), U.S. Federal Reserve Board (Fed), Bank of England and European Central Bank (ECB), held their policy interest rates steady at their July meetings. The U.S. and Europe both reported their respective economies expanded in the second quarter of 2026. Trade tensions were back in the news. The U.S. implemented new tariffs on approximately 60 countries/regions around the world, which replaced the expiring tariffs that were imposed when the “Liberation Day” tariffs were voted down by the U.S. Supreme Court. Meanwhile, the U.S. threatened fresh tariffs on some Canadian goods.

In Canada, the S&P/TSX Composite Index moved higher over the month, getting a strong performance from the energy sector. U.S. equities inched lower. Yields on 10-year government bonds in Canada and the U.S. rose over the month.

Mideast attacks resume, putting a peace deal in question

The ceasefire between the U.S. and Iran, reached through a memorandum of understanding in June, broke down in July after Iran attacked three commercial vessels in the Strait of Hormuz for bypassing its preferred shipping routes. The U.S. responded with strikes against Iranian targets on July 6 and 7, and U.S. President Donald Trump declared the truce over. Iran retaliated with missiles at U.S. allies in the region and struck a power and desalination plant in Kuwait twice within days. Tensions rose further later in the month after Trump warned Iran would “pay” for the deaths of U.S. service members, pushing oil prices higher. By late July, fighting appeared to pause after roughly two weeks of renewed conflict, though the ceasefire remains fragile and shipping through the Strait of Hormuz stayed well below normal, with fewer than 10 vessels passing daily compared with about 100 before the war. Oil prices reflected this uncertainty, rising sharply over the month. In turn, gasoline prices also surged higher, and once again raised concerns about another bout of inflationary pressures. Until a durable resolution is reached, elevated energy prices are likely to persist, keeping upward pressure on inflation and costs for Canadian consumers and businesses and adding uncertainty to the economic outlook.

Canada facing threats of more tariffs from the U.S.

Statistics Canada reported in July that Canada’s merchandise trade surplus widened to $4.2 billion in May, the largest in four years, as exports climbed to a record $77.1 billion while imports edged lower. Exports to the U.S. rose for a fourth straight month, pushing Canada’s surplus with its top trading partner higher, helped by stronger metal and aluminum shipments. Trade tensions with the U.S. escalated further in July, though. U.S. President Donald Trump signed an order imposing new 50% tariffs on a range of Canadian goods, including alcohol, dairy and hockey sticks, taking effect in mid-August, citing Canada’s unfair treatment of U.S. dairy, alcohol and auto exports. Days later, Washington launched a separate round of tariffs on dozens of countries, citing concerns about forced labour in global supply chains. Canada, alongside Mexico and the U.K., was hit with a 10% tariff, while several other countries/regions face a 12.5% tariff. However, goods compliant with the Canada-United States-Mexico Agreement remain exempt. While May’s data show Canadian exporters holding up well so far, the layering of new U.S. tariffs adds fresh uncertainty. If these tariffs persist, they could weigh on exports and economic growth in the months ahead, adding pressure to an already fragile outlook for Canada’s economy.

U.S. inflationary pressures moderate, but upside risks reemerge

In July, the U.S. reported cooling headline inflation in June, but signs of slower economic growth gave the Fed more to consider. The consumer price index fell 0.4% in June, its steepest monthly drop since 2020, as gasoline prices tumbled, pulling annual inflation down to 3.5% from 4.2% in May. Core prices, which exclude volatile food and energy prices, held flat that month, while the annual core inflation rate slowed to 2.6% in June from 2.9% in the previous month. The Fed’s preferred inflation gauge, the personal consumption expenditures price index (PCE), told a similar story, dipping 0.1% in June, though it remains up 3.7% on a year-over-year basis. Real consumer spending rose 0.4%, showing households are still spending. Looking at overall economic growth, an advance estimate showed the U.S. economy grew at an annualized rate of 1.5% in the second quarter of 2026, down from 2.1% in the first quarter, as government spending declined even as consumers, businesses and exporters spent more. Slowing economic growth alongside elevated prices could make the Fed’s coming decisions trickier, testing whether it can support economic growth without reigniting inflation. The Fed held its federal funds rate steady at a target range of 3.50%–3.75% at its July meeting, which was widely expected by economists. The Fed noted its commitment to price stability, saying it is willing to shift monetary policy depending on the prevailing economic conditions.

The ECB holds after hiking rates

The ECB held its policy interest rates steady at its July meeting, after raising them by 25 basis points each at its June meeting, which was the ECB’s first hikes since 2023. That June increase came in response to an energy-driven surge in inflation tied to geopolitical tensions in the Middle East. Data released in July showed some easing of price pressures. Europe’s annual inflation slowed to 2.8% in June from 3.2% in May, as energy costs grew at a softer pace. Still, inflation remains above the ECB’s 2% target, and officials are watching closely to see how much further the energy shock feeds through the economy. Plus, the escalating attacks in the Mideast and no clear timeline on an agreement on a peace deal cloud the outlook for inflation. On the economic growth side, a flash estimate released in July showed that Europe’s economy expanded 0.4% in the second quarter of 2026, an improvement from no growth (0.0%) in the first quarter. Taken together, Europe’s economy is growing modestly while inflation eases only gradually, a balance the ECB will need to keep monitoring. For Canada, steadier European growth is a mild positive for global trade and demand for Canadian exports, though still-elevated inflation abroad is a reminder that energy-driven price pressures remain a global challenge the BoC will also need to watch.

Market performance - as of July 31, 2026