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.

The main event in global markets during August was a meaningful spike in volatility following two unrelated shocks which combined to significantly increase uncertainty in multiple global markets simultaneously.

The first was much weaker than expected US labour market data whereby the US economy added only 114,000 new jobs during July¹ which was considerably softer than the prior reading of 206,000 and consensus at 175,000. While a cooler labour market is one of the prerequisites for interest rate cuts, the labour market slowing down by this magnitude resulted in increased concern that the US economy was cooling too quickly and at greater risk of a recession.

The second was the sudden unwinding of the Japanese Yen carry trade after Japan’s central bank raised the cost of borrowing for only the second time in 17 years and outlined a plan to unwind its massive bond buying programme, which combined to drive a rapid appreciation of the Japanese yen, which strengthened 14% against the US dollar between 10 July to 5 August. This was the catalyst for the Nikkei 225 Index plunging 12.4% (its worst one-day fall since Black Monday in 1987) and the broader TOPIX Index falling 20% over three consecutive days (its biggest three-day fall on record). These sudden moves ripped through global asset markets until the Bank of Japan softened its hawkish stance, indicating that it would not increase rates further amid market instability. This was enough to stabilise markets and kick-off a recovery in Japan and elsewhere with the Nikkei and TOPIX ending the month down only 1.2% and 2.9% respectively.

The sudden volatility, the collapse in asset prices globally, then swift recovery leads us to reflect on a vexing situation. On one hand the sudden, dramatic moves in markets underscored how interconnected and collectively fragile the global financial system has become, while on the other hand most markets recovered with such speed, it could indicate the complete opposite – a robustness across markets globally.

In terms of inflation data, the July reading of the Consumer Price Index (CPI) ticked down to 2.9% year-over year from 3.0% in June and the Personal Consumption Expenditures (PCE) Price Index (the US Federal Reserve’s preferred measure of inflation) and Core PCE (a measure of underlying inflation) remained unchanged at 2.5% and 2.6% year-over-year respectively, slightly elevated relative to the US Federal Reserve’s stated target of 2%.

The cooling US labour market and incrementally cooler inflation, continued to increase the likelihood of interest rate cuts and resulted in a continuation of the downward trend in US Treasury yields (yields on 2-year US Treasuries contracted 34 basis points to 3.92% and yields on 10-year US Treasuries contracted 13 basis points to 3.90%). At the end of 2023, expectations were that the first interest rate cut would occur in March of 2024, which proved too early. At the end of August, markets were pricing in a 25 basis point interest rate cut in September, a total of 100 basis points of cuts of by the end of 2024, and a total of 225 basis points of cuts by the end of 2025.

The US dollar (-2.3%) continued its downward trajectory, coincident with the increasing likelihood of interest rate cuts.

In equity markets outside of Japan, global equities (+1.7%) recovered quickly from the volatility of early August (which saw the MSCI World Index fall 6.4% intra-month) to end the month higher. At country level, all major equity markets ended the month higher except for Mainland China (-3.3%), Korea (-3.5%) and Japan (mentioned above).

At sector level within the US market, the energy sector (-2.3%) and the consumer discretionary (-1.1%) were the only sectors to post a negative performance for the month, driven by increasing fears that the economic slowdown will turn into a recession (and coincident with a weaker oil price, -2.4%). Consumer staples (+5.8%), which is considered a safe haven and real estate (+5.6%), which is sensitive to falling interest rates, were the best performing sectors.

At factor level, small caps (-1.6%) were a notable underperformer relative to large caps (+2.2%). This is likely attributable to their greater sensitivity to economic uncertainty and their strong performance in the prior month (during July, small caps outperformed large caps by 8.7 percentage points).

The Clean Energy Index (-4.7%) which is a sub-set of small caps, followed small caps lower (the Clean Energy Index’s median market capitalisation is US$2 billion), driven by its sensitivity to economic uncertainty, and most likely compounded by the additional short-term uncertainty related to the US presidential election. Last month we published a research paper exploring the implications for clean energy in the event of a second Trump presidency.

Within clean energy, three industry segments accounted for two-thirds of the drawdown. Electric vehicles (-11.7%, detracting 1.4%), enabling technology (-16.0%, detracting 0.9%) and energy storage (-12.2%, detracting 0.9%) were under most pressure, driven by drawdowns at stock level.

The key detractors at stock level included the electric vehicle charging technology providers Blink Charging (-43.5%) and Wallbox (-16%) within the electric vehicle segment; Wolfspeed (-48.3%) within enabling technology; and Enovix (-33.9%) and Freyr Battery (-31.7%) within energy storage.

The clean utilities and wind segments were the only positive contributors for the month, although neither segment had notable stock-specific contributors. These segment moves were driven more by the relative safe haven characteristics of the industries themselves, which is related to larger market capitalisations (the median market capitalisation of clean utilities and wind is US$5.4 billion and US$2.2 billion respectively relative to the remainder of the Clean Energy Index at US$1.2 billion) and lower annualised volatility (the average annualised volatility of clean utilities and wind is 30% and 46% respectively relative to the remainder of the Clean Energy Index at 71%).

Footnotes

¹ US Employees on Nonfarm Payrolls Total Month-over-month Net Change.