We share our latest observations on global asset markets in relation to T8 Energy Vision

All movements are expressed in United States (US) dollar terms, unless otherwise stated.

Market risk appetite fell markedly during April following higher than expected inflation readings which further pushed out expectations for rate cuts. The data in focus was the year-over-year rise in personal consumption expenditures (PCE) price index which accelerated to 2.7% in March from 2.5% in February, relative to the US Federal Reserve’s stated target of 2%. Core PCE (a measure of underlying inflation) came in at 2.8%, unchanged on its February level.

We reflect on how quickly expectations have shifted. We entered the year with the market anticipating that an interest rate cut from the US Federal Reserve in March would kick-off a 175 basis point cutting cycle (extending into 2025). By the end of April, expectations had been compressed, with markets pricing in a 60% chance of a rate cut in September, a 50% chance of a second rate cut by the end of the year and even a roughly 20% chance of no rate cuts at all during 2024.

Notwithstanding this shift in expectations, we believe the key point is that we are much nearer the end of the hiking cycle than the beginning (supported by inflation’s level in absolute terms and the fact that its trajectory continues to trend lower overall). Further, we reflect that the expectations in relation to the timing of interest rate cuts have been pushed out based on an assumption that the data will be linear and predictable, when in fact it won’t be.

The yield curve shifted sharply upwards and bond prices were under pressure across the board with the Global Aggregate Bond Index -2.5% and yields on 10-year US Treasuries rising 48 basis points to 4.68%.

The US dollar strengthened (+1.7%), reflecting its typical safe haven status.

The rally in global equities ended (-3.9%) with US indices leading the move lower (S&P 500 -4.2%). Regional performance was mixed with Hong Kong (+7.4%), the United Kingdom (+2.4%) and China (+2.1%) positing gains, while Japan (-4.9%) underperformed and Germany (-3.0%) and France (-2.7%) experienced modest draw-downs.

At sector level within the United States market, utilities (+1.6%) was the only bright spot, posting its third consecutive positive monthly gain, notwithstanding its sensitivity to interest rates (which implies it should have been among the worst performers). All other sectors declined, led by real estate (-8.6%). Notable was the fact that the energy (-0.9%) and materials (-4.6%) sectors declined notwithstanding positive movements in key energy and commodity prices such as crude oil (+0.4%), gold (+2.5%) and copper (+12.8%), likely reflecting equity risk aversion. The copper price moved sharply higher driven by what appears to be speculative long futures positions on the LME and Comex and notwithstanding fundamentals such as slowing global economic activity (a headwind for demand) and global inventories on commodity exchanges sitting at multi-year highs with a robust supply outlook for the second half of 2024 (no apparent present or near-term scarcity).

In terms of factors, market cap was most decisive with small caps (-7.1%) underperforming large caps (-4.3%) which fell in line with broader indices. The underperformance of small caps was consistent with their sensitivity to interest rate expectations. There was little difference between US growth (-4.3%) and value (-4.4%) stocks which both fell in line with broader indices.

The Clean Energy Index (-8.5%) fell in line with global equities and by more or less the same magnitude as small caps (which is to be expected given its median market capitalisation of US$2 billion). The solar sector (-11.9%) felt the greatest pressure driven by its high sensitivity to interest rates.