U.S. citizen Karen Dempsey holds small flags during a “Peace, Love, and a Handshake” solidarity rally at the Peace Arch Border Crossing at the Canada-U.S. border in Blaine, Washington, U.S. April 6, 2025. REUTERS/David Ryder
Index Performance
U.S. broad-based equity indices finished firmly in the red, dragged down by renewed weakness within technology names. Losses spread across the market, with the Nasdaq (-1.74%) leading the decline, followed by the Russell 2000 (1.28%), S&P 500 Total Return Index (-0.89%) and the Down Jones Industrial Average (0.27%).
Broad-based fixed income indices also ended the week in a sea of red. The FTSE Municipal Tax-Exempt Investment Grade Bond Total Return Index posted a marginal drop of (-0.16%), followed by the FTSE High Yield Total Return Index (-0.10%), and FTSE U.S. Broad Investment Grade Bond Total Return Index (-0.05%).
Macro Viewpoint
The world’s friendliest border is under strain as Washington’s harder line on trade threatens to turn the world’s closest economic partnership into a high-stakes tariff standoff. Tensions have been brewing since President Trump float the idea that Canadians favored becoming the fifty-first state and vowed to see it though, alongside his claim that Canada and Mexico ranked among the primary catalysts behind the U.S. fentanyl crisis. In the earlier part of 2025, President Trump invoked the International Emergency Economic Powers Act (IEEPA) to impose a 10% tariff on Canadian energy imports and a 25% tariff on all other Canadian goods. Canada retaliated in kind, levying a 25% tariff on nearly $21bn of U.S. imports, but this was merely the beginning. Following an investigation by the Department of Commerce, President Trump imposed a 25% tariff on steel and aluminum goods across a range of counties, including Canada pushing the total effective rate to 50% for Canadian steel and 35% on Canadian aluminum. Ottawa answered, predictably, with a further round of 25% retaliatory tariffs on U.S. steel, aluminum, and assorted goods. This see-saw like tension has leached into other sectors such as automotive, lumber, and dairy.
Nearly a year later, the U.S. Supreme Court signaled that the IEEPA does not grant the President authority to impose tariffs, yet the pressure remained as the Trump administration pivoted to a 150-day temporary import surcharge on the bulk of U.S. imports. As of today, both countries remain at a standstill and the U.S. has moved to impose an additional 50% tariff on Canadian building materials, agriculture products, and consumer and retail goods. Prime Minister Mark Carney noted that “Canada has worked intensively and in good faith to reach a deal that works for both nations,” but ultimately concluded that “America has changed, and pledge a dollar-for-dollar retaliatory tariff to protect Canadian citizens.”
A full blown trade war with Canada would only compound an already challenging inflation trajectory, adding pressure to an economy still contending with elevated prices in the wake of the energy shock from the U.S.-Iran conflict. Should these tariffs come into fruition, businesses would most likely pass the costs through to consumers already stretched thin, creating a supply bottleneck and weighing on GDP, which has already softened from Q1 to Q2. Year-to-date, the Canadian dollar has weakened modestly (0.3%) as of August 2. Captain America and Iron Man eventually learned that fighting among allies carries a cost, a lesson Washington and Ottawa may want to keep in mind as the tariff battle intensifies.
On the Yield Front
Treasury yields soared to the moon this week, with the front-end of the curve leading the liftoff. The two-year climbed 4.9bps, the five-year rose 3.7bps, the 10-year jumped 4bps, and the 30-year soared 3.9bps. This near-parallel shift points to a broad repricing rather than any single part of the curve doing the bulk of the work.
Fund Flows by Asset Type
Investors regained their footing, and pressed the throttle on riskier assets, with nearly a $22bn net inflow across the fund universe. Equities led the race with $12.1bn in net flows, while taxable bonds were trailing close behind with $9bn, a rare week in which stocks and credit pulled in the same direction with force.
Equities hauled in $12.1bn, but the story sat almost entirely with one group: U.S. Large-Cap Funds pulled in an astonishing $11bn, doing nearly all of the heavy lifting. U.S. World Sector Equity Funds (+$2bn), U.S. Equity Income Funds (+$1.8bn), U.S. Developed International Market Funds (+$1.6bn), and U.S. Multi-Cap Funds (+$1.4bn) all added to the rally. On the opposite end of the spectrum, U.S. Sector Equity Funds lost $4.8bn, a stark rotation from sector targeted bets, while U.S. Mid-Cap Funds ($809m) also finished in the red. U.S. Small-Cap Funds (+$70m) and U.S. Developed Global Market Funds (+$63m) posted modest inflows.
Within the Fixed Income universe, Taxable Bond Funds had a strong week with $9bn in net flows and the demand was broad. U.S. General Domestic Taxable Fixed Income Funds led with $2.9bn, with the short end trailing right behind, U.S. Short/Intermediate Investment-Grade Funds and U.S. Short/Intermediate Government & Treasury Funds each gained $1.9bn. Every taxable classification finished in positive territory, U.S. Government & Treasury Fixed Income Funds added $1.7bn, U.S. Alternative Bond Funds gained $217m, U.S. Emerging Market Debt Fund grabbed $150m, and U.S. World Income Funds gathered $110m, while U.S. High Yield Funds had a moderate gain of $68m. Within Municipals the rally continues for the 18th consecutive week, with a net inflow of $853m.
There is light at the end of the tunnel for Mixed-Assets Funds as the classification eked a marginal inflow of $149m, after weeks of outflows. Money Market Funds was the lone outflow, shedding only $3.6bn.
Elsewhere, U.S. Commodity Funds, and U.S. Alternative Equity Funds finished slow and steady, with favorable inflows of $2bn and $1.5bn, respectively.
