Navigating market shifts: global interest-rate trends and market dynamics

Canada’s equity market traded sideways in a tight range through the second quarter and closed with a narrow loss. Investor sentiment was dampened by slowing economic growth, even as a downtrend in inflation opened the door for the Bank of Canada to announce a quarter-point rate cut in June, which marked its first reduction in more than four years. While precious metals mining stocks performed well, energy and financials—the market’s two largest sectors—finished slightly in the red. Index-level performance was also pressured by weakness in rail stocks and the online retailer Shopify, Inc. Canada trailed the broader global indexes in the quarter, primarily as a result of its value tilt and below-average weighting in the types of faster-growing information technology companies that continued to outperform.

U.S. stocks rose to new highs in the second quarter of 2024, despite a shaky start amid concern that sticky inflation data would delay the U.S. Federal Reserve’s decision to cut target interest rates. The market, however, rebounded in May and June, buoyed by prospects for generative artificial intelligence (AI), strong corporate earnings reports, moderating inflation, and healthy consumer and economic indicators. Investors shook off concerns over stubborn inflation, ongoing conflicts in Ukraine and Israel, and the upcoming U.S. presidential election. Within the broad-based S&P 500 Index, the information technology and communication services sectors—totaling together over 40% of the index—led the way, with notable advances from a handful of mega-cap stocks positioned to benefit from AI. Utilities stocks, which stand to gain from AI as new data centers fuel greater demand for electricity, also rose. Most other sectors posted relatively modest gains or losses, with the weakest performance coming from the economically sensitive materials sector.

Global equities finished the second quarter with positive performance, as investor sentiment remained supported by stable global growth trends and healthy corporate earnings. Europe performed well overall, but stocks finished well off of their midquarter highs following surprising election results in France and other nations. In Asia, Japan was a notable underperformer in Canadian dollar terms due to a pronounced weakness in the yen. The emerging markets outpaced their developed-market peers behind strong gains for China, India, and Taiwan.

Global bond markets posted mixed results but declined in U.S. dollar terms for the second quarter. North American bond markets posted positive returns amid weaker-than-expected U.S. economic data and the first interest-rate cut by the Bank of Canada in more than four years. Bond markets in Europe declined for the quarter despite an interest-rate cut by the European Central Bank amid an uptick in the region’s inflation rate. In Asia, the 10-year government bond yield in Japan rose above 1%, the first time it has reached that level in more than 11 years, which put downward pressure on the performance of bond markets in the Asia-Pacific region. Overall, bond yields were broadly higher in most regions of the globe, leading to lower bond prices. From a sector perspective, sovereign government bonds declined the most, reflecting their greater interest-rate sensitivity, while high-yield corporate bonds posted positive returns for the quarter.