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

• A trend reversal in inflation and employment data (stronger labour market and hotter inflation) resulted in a sharp rise in bond yields and tempered expectations for over-sized interest rate cuts in the near term.
• We observe increasing appreciation that US government fiscal largesse (budget deficits and increasing debt) is not sustainable and may also have been impacting bond yields.
• While the election result is in, with Donald Trump elected as President, the lower house remains undecided (at the time of writing) albeit appearing on track for Republican control with a tight balance of power. We expect uncertainty is likely to remain elevated until after inauguration day as markets wait to see how Trump’s rhetoric will translate to policy and therefore ultimately fundamentals.
• In the meantime, the expectation is that renewables are dead and the future is all nuclear and gas-fired (“drill, baby, drill”) electricity generation. The reality is that the US has increasing demand for electricity for the first time in 20 years (driven by the significant and rapidly growing electricity needs of data centres supporting the growth in artificial intelligence technologies). The US needs more electricity generation capacity quickly. New nuclear is extremely unlikely to be part of the picture inside 10 years (despite the considerable hype) and natural gas is unlikely to fuel more than 30-40% of the new electricity generation capacity, meaning the majority will be produced from solar and wind combined with energy storage. This is quite a different reality to the rhetoric.
• Overall, we have a very optimistic outlook for all electricity generation technologies, their supply chains and associated infrastructure. We have upgraded our outlook for this thematic following the election of Trump.

Market update

Macroeconomic data

October saw a sudden spike in US Treasury yields (10-year US Treasuries spiked by 50 basis points to 4.28%) and the US dollar (+3.2%) driven by stronger than expected labour market data and hotter than expected inflation, ending a downward trend since April. Further, as the US election drew closer, a realisation seemed to dawn on the market that neither candidate was prioritising fiscal responsibility and the budget deficit is increasingly seen as unsustainably high. This may also have contributed to yields being driven higher. The election of Trump therefore doesn’t change this dynamic (Trump’s team has been discussing additional tax cuts) and it is an important issue to monitor.

Inflation data

The September reading of the Core Consumer Price Index (Core CPI) came in above expectations, ticking up to 3.3% year-over year from 3.2% in August. The US Federal Reserve’s preferred measure of inflation, the Core Personal Consumption Expenditures Price Index (Core PCE), remained sticky and above expectations at 2.7%. Inflation remains slightly elevated relative to the US Federal Reserve’s target of 2%.

Employment data

US labour market data¹ came in much stronger than expected as the US economy added 254,000 new jobs during September (relative to consensus at 150,000), bringing the unemployment rate to 4.1% (from 4.2% in August). Further, both the August (originally 142,000 jobs added, revised to 159,000) and the July (89,000 originally, revised to 144,000) data was retrospectively revised upwards (July for the second time). This whipsaw indicates a concerning lack of visibility regarding what is going on in the US labour market for the US Federal Reserve and markets. Also notable, average hourly earnings rose by 4.0% year-over-year, above the rate of inflation.

Fiscal largesse

We are observing increasing awareness that US budget deficits persisting indefinitely is becoming unsustainable. The US is currently running deficits of 5.5% of GDP. The Congressional Budget Office projects the 2024 deficit to increase to almost $2 trillion (6.7% of GDP).

US government debt has reached extraordinary levels with the total outstanding public debt hitting $36 trillion as of 31 October 2024. This represents an increase of approximately 7% year-over year, outpacing GDP growth and therefore driving continued expansion of the debt-to-GDP ratio. Interest payments have risen from 8.3% of government receipts in April 2022 to 18% in August 2024.

As of June 2024, government debt accounted for 122% of the country’s nominal GDP. This is relative to the all-time high in March 2021 (during the COVID-19 pandemic) of 130%, a low of 32% in September 1974 (following a period of high inflation) and an average of 66% from 1940 until 2023. Economists expect the ratio to continue increasing in a more-or-less linear fashion through 2026 when it is expected to hit 128%. The corollary is that something has to give, whether it be spending cuts, tax hikes or higher bond yields and a weaker US dollar. This is an increasingly important issue for all investors to monitor.

Interest rates

At the end of October, markets were pricing in an additional 50 basis points of cuts of by the end of 2024 (relative to 75 basis points only one month earlier).

Market impacts

The impact of stronger than expected labour market data and hotter than expected inflation on the bond market was savage. Yields on 2-year, 5-year and 10-year US Treasuries spiked by 53, 60 and 50 basis points respectively, to 4.17%, 4.16% and 4.28%. The Global Aggregate Bond Index fell 3.4%.

In equity markets, all major markets globally contracted with the exception of Japan (+3.1%), contributing to global equities finishing the month -2.0%. Mainland China (-1.7%) and Hong Kong (-3.9%) consolidated following their extraordinary performance during September.

The US stock market (-1.0%) also declined with very mixed performance from the mega-cap technology stocks (e.g. Nvidia rose 9.3% while Microsoft fell 5.6% and the ‘magnificent seven’ index  fell 0.4%). At sector level within the US market, only the financials (+2.6%), communications services (+1.8%) and energy sectors (+0.7%) finished the month with a positive return. Health care (-4.7%), materials (-3.5%) and real estate (-3.4%) were the worst performers.

At factor level, large caps (-0.8%) outperformed small caps (-1.5%). The underperformance of the latter was likely related to their greater sensitivity to interest rate expectations, following the sharp move in Treasury yields.

Clean energy stocks

The Clean Energy Index (-5.4%), a sub-set of small caps (the Clean Energy Index’s median market capitalisation is US$2 billion), underperformed. In our view, the lead up to the US presidential election created significant uncertainty within energy markets and a material overhang on the majority of the clean energy sector.

While the election result is in, with Donald Trump elected as President, the lower house remains undecided (at the time of writing) albeit appearing on track for Republican control with a tight balance of power. We expect uncertainty is likely to remain elevated until after inauguration day as markets wait to see how Trump’s rhetoric will translate to policy and therefore ultimately fundamentals.

In the meantime, the expectation is that renewables are dead and the future is all nuclear and gas-fired (“drill, baby, drill”) electricity generation. The reality is that the US has increasing demand for electricity for the first time in 20 years (driven by the significant and rapidly growing electricity needs of data centres supporting the growth in artificial intelligence technologies). The US needs more electricity generation capacity quickly. New nuclear is extremely unlikely to be part of the picture inside 10 years (despite the considerable hype) and natural gas is unlikely to fuel more than 30-40% of the new electricity generation capacity, meaning the majority will be produced from solar and wind combined with energy storage. This is quite a different reality to the rhetoric.

Overall, we have a very optimistic outlook for all electricity generation technologies, their supply chains and associated infrastructure. We have upgraded our outlook for this thematic following the election of Trump.

Within clean energy during October, the majority of the negative of the return was driven by solar (-14.7%, detracting 331 basis points) and clean utilities (-8.3%, detracting 228 basis points). Critical materials went against the tide (+22.1%, contributing 188 basis points) driven by sudden enthusiasm for lithium stocks following Rio Tinto’s takeover offer for Arcadium Lithium. We remain cautious on the lithium sector on the basis of our 12 month outlook for significant new mine supply entering the market, which we expect to put further pressure on the lithium price.

Footnotes

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