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.

Key points

• Global equities declined and bonds rallied (risk-off) on falling consumer confidence and slowing consumer spending in the US (you will recall that consumer spending accounts for nearly 70% of US economic activity).
• T8 Energy Vision held its ground, outperforming US equities and its benchmark.
• In our view, the key issue (and opportunity) facing energy markets is the incredible demand for electricity in the US. For the first time in 20 years, the US is experiencing increasing demand for electricity. This is being driven by the boom in data centres, and hasn’t yet been fully appreciated by markets.
• Tariffs, trade wars and Chinese challengers to US technology supremacy do not change our positive outlook for this electricity demand growth.
• We are very constructive on the fundamentals of the electricity generation industry as well as transmission and distribution grid infrastructure and all of the associated supply chains (from critical minerals, to transformers and cables, to the latest nuclear reactor technology).
• Falling interest rates (100 basis points of cuts so far) are yet to have a material impact on our focus area of the electric energy sector and its supply chains (which have historically displayed very high sensitivity to interest rates). We believe that this lag is explained by the noise from President Trump in relation to energy and will prove temporary.

Market update

Global equities declined and bonds rallied on worries of a slowing US economy driven by consumer spending. The mega-cap US technology stocks going into reverse (most likely a continuation of the fallout from the DeepSeek shock) and increasing uncertainty in relation to tariffs compounded the negative sentiment – we recently published a report covering these issues and our comments remain relevant. T8 Energy Vision held its ground, outperforming global equities and its benchmark.

Macroeconomic data

Slowing consumer spending

Worry about the US economy stemmed from data indicating falling consumer confidence and slowing consumer spending (you will recall that consumer spending accounts for nearly 70% of US economic activity). Personal spending reversed materially, contracting 0.2% month-over-month relative to consensus for an expansion of 0.2% and the prior month’s expansion of 0.8% (revised upward from 0.7%). Consumer confidence slipped to 98.3 against a prior reading of 105.3 and expectations for a smaller contraction to 102.5. It is worth noting that readings of less than 100 indicate a more pessimistic outlook and month-over-month changes of more than 5 points are considered significant.

Forecasts for declining US GDP

The Federal Reserve Bank of Atlanta appears to be capturing this slowdown in its outlook for US gross domestic product (GDP), forecasting a decline of 1.5% quarter-over-quarter annualised for the first quarter relative to the latest estimate of 2.3% growth for the last quarter of 2024.

High inflation and low unemployment prevent immediate interest rate cuts

While slowing economic activity can often precede interest rate cuts, the inflation and employment data reported during the month complicates the picture – inflation appears to be stuck at too elevated a level and the labour market remains too strong to necessitate a cut in the immediate term.

The Consumer Price Index (CPI) at 3.0% and Core CPI (excluding food and energy) at 3.3% both came in moderately higher month-over-month and relative to forecasts. While the US Federal Reserve’s preferred measure of inflation, the Core Personal Consumption Expenditures Price Index (Core PCE), cooled to 2.6% (from the prior month’s upwardly revised 2.9%) in line with market expectations.

The labour market appears solid with unemployment 10 basis points lower month-over-month at 4.0% and the economy adding 143 thousand jobs during January (100,000 to 150,000 is considered to have a more or less neutral impact on unemployment), although this was fewer than the 175 thousand expected and fewer than the prior month’s upwardly revised 307 thousand.

The solid US labour market is the only factor standing between the US and economic stagflation (defined as the combination of high inflation, high unemployment, and stagnant or slow economic growth), which would be a headwind for risk appetite but very good for safe havens such as gold.

Markets suddenly pricing in two rate cuts in 2025, with the first in June

While the data didn’t result in an official change to the US Federal Reserve’s outlook for interest rates (while interest rates remain ‘meaningfully’ above the neutral rate, there is no urgency to cut rates based on persistent inflation and a strong labour market), it has resulted in market expectations increasing to two cuts during 2025 (instead of one) and the next interest rate cut being brought forward to June from July.

Market impacts

Treasury yields benefitted from lower risk appetite and continued to contract with 10-year US Treasuries ending the month 33 basis points lower month-over-month (at 4.21%). The Global Aggregate Bond Index (+1.4%) followed treasuries higher.

The US dollar continued to weaken (US Dollar Index -0.7% to 108) driven by the weak US economic data, lower Treasury yields and increasing expectations for interest rate cuts.

Within commodities, fortunes were mixed with gold (+2.1%) moving in the opposite direction to silver (-0.5%), while copper’s strong performance (+4.6%) came in contrast to crude oil (-4.7%) sliding backwards.

Global equities (-0.8%) were dragged down by the US (S&P 500 -1.4%) which also masked very strong performances from Hong Kong (+13.4%) and Germany (+3.8%).

With the exception of Nvidia (+4.0%), which was the laggard within its mega-cap cohort last month, the mega-cap US technology stocks declined materially (Magnificent 7 Index -8.7%) with Tesla (-27.6%), Google (-16.5%) and Amazon (-10.7%) all suffering double digit drawdowns. Chinese technology stocks were a significant beneficiary of this shift in belief, with Alibaba (+44.4%), BYD (+36.1%) and Tencent (+19.3%) posting significant gains.

This was attributed to a continuation of the fallout from the DeepSeek shock in late January which was the first seed of doubt in what had been a prevailing belief that US mega-cap technology stocks would be perpetually dominant (US exceptionalism). This is a key issue for investors to monitor on the basis that these stocks account for over 30% of the S&P 500’s market capitalisation and US stocks account for over 70% of global equities indices (i.e. MSCI World Index), while Chinese stocks are under-represented. We also believe that the mega-cap US technology stocks are losing (or have lost) their safe haven status, which has significant implications for the risk profile of global equity markets and should drive investors to diversify.

At sector level, consumer discretionary stocks (-9.4%) were the worst performers, dragged down by Tesla and Amazon. Safe haven sector, consumer staples (+5.6%) was the best performer amid the low equity risk appetite.

At factor level, value stocks (+0.2%) outperformed growth stocks (-3.7%) and large caps (-1.9%) outperformed small caps (-5.4%).

Future energy stocks

The Clean Energy Index (-6.3%) underperformed global equities in line with US small caps.

While the perception remains that renewables are under pressure and the future of electricity will be all nuclear and gas-fired (Donald Trump’s ‘drill, baby, drill’ comments), our research indicates that an ‘all nuclear and gas’ scenario is implausible. We refer you to a short summary of our expectations for the future energy mix in the US.

Within the benchmark, solar (-9.5%) detracting 207 basis points and energy storage (-21.8%) detracting 166 basis points were the biggest segment level detractors.

Outlook

We have a more optimistic outlook than consensus for electricity demand growth (the US has increasing demand for electricity for the first time in 20 years driven by data centres) and the fundamentals of the electricity generation industry as well as transmission and distribution grid infrastructure and all of the associated supply chains (from critical minerals, to transformers and cables, to the latest nuclear reactor technology).

We have continued to upgrade our outlook for electricity demand growth following Trump’s inauguration and executive orders and notwithstanding the uncertainty created by DeepSeek and tariffs (you will recall that we reported on these issues last month in a separate paper). We reiterate that falling interest rates are yet to have a material impact on our focus area of the electric energy sector and its supply chains (which have historically displayed very high sensitivity to interest rates). We believe that this lag is explained by recent policy uncertainty (especially up to and following the US election) which has temporarily obscured the impact of this significantly positive catalyst.