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

• US interest rate cuts enabled the global easing cycle to begin, bringing to an end the steepest, longest interest rate cycle since the 1970s.
• The magnitude of China’s stimulus should not be overlooked. So far it has been very positive for sentiment but it is still to be seen whether it will drive a broader economic recovery in China.
• While the risk of a US recession remains (and is being stoked by weak labour market data), robust GDP growth is so far tempering these fears.
• The US presidential election is the key area of uncertainty to monitor.

Summary

The key factor in global markets during September (and a positive catalyst) was the beginning of interest rate cuts. The US Federal Reserve cut interest rates for the first time since the depths of the COVID-19 pandemic in March of 2020. The move marked the end of the interest rate cycle which was the steepest, longest interest rate cycle since the 1970s.

We have published a separate insight in relation to the interest rate cuts.

The interest rate cut led to a continuation of the downward trend in the US dollar (-0.9%) and US Treasury yields. Notably, yields on 2-year US Treasuries contracted 28 basis points to 3.64% and yields on 10-year US Treasuries contracted 12 basis points to 3.78% (the spread between these durations indicates that the yield curve is normalising, coincident with the cut in interest rates). At the end of September, markets were pricing in an additional 75 basis points of cuts of by the end of 2024, and a total of 125 basis points of cuts during 2025, bringing the effective federal funds rate to approximately 3%.

In equity markets, global equities (+1.7%) finished the month higher despite divergent performance across major markets. Mainland China (+17.4%) and Hong Kong (+17.5%) were the outsized standouts following the significant support and stimulus measures described above, while elsewhere in Asia, South Korea (-3.0%) and Japan (-1.9%) underperformed and so too Europe (-0.5%). Driven by the interest rate cut and solid economic data, the extraordinary momentum in the US stock market (+2.0%) continued, driven by mega-cap technology stocks (the ‘magnificent seven’ index +6.5%).  

At sector level within the US market, the strongest sectors were consumer discretionary (+7.0%), which rebounded having been among the worst performing sectors last month, and utilities (+6.4%), which is highly sensitive to falling interest rates. Energy (-2.8%), health care (-1.8%) and financials (-0.7%) were the only sectors to post a negative performance for the month. The energy’s sector’s performance was driven by the weaker oil price (-8.9%) for a variety of macro- and microeconomic factors.

At factor level, large caps (+2.0%) outperformed small caps (+0.6%). The underperformance of the latter may have been related to their greater sensitivity to economic uncertainty given the recession fears.

The Clean Energy Index (+3.3%), which is a sub-set of small caps (the Clean Energy Index’s median market capitalisation is US$2 billion), outperformed small caps. In our view, the US presidential election remains the key area of uncertainty for the sector. During September investor sentiment regarding the US election appeared to have had a material influence on the sector’s performance on the basis that the first presidential debate (held on 10 September) being won by Kamala Harris (according to most media outlets) preceded the Clean Energy Index (+8.6%) outperforming the S&P 500 (+4.9%) and small caps (+6.3%) between 11 September and month end.

While it is impossible to quantify, we believe that the Clean Energy Index is pricing in considerable uncertainty and negativity associated with the election outcome (i.e. an election victory and second presidency for Donald Trump). During July we published a research paper exploring the implications for clean energy under the scenario of a second Trump presidency. There are excellent arguments to believe that it would not be as negative for clean energy as some of his rhetoric would suggest. A great example is that installed solar capacity in the US more than doubled while he was last in office. The election remains a source of uncertainty to monitor and our report remains relevant.

Within clean energy, more than two-thirds of the return was driven by clean utilities (+4.5%, contributing 120 basis points) and critical materials (+12.4%, contributing 90 basis points). Clean utilities strengthened in line with the wider utilities sector and driven by increased risk appetite within producers of critical minerals such as lithium and rare earths.

The key movers at stock level included Chinese electric vehicle manufacturers NIO (+65.3%) and XPeng (+51.3%) which benefitted from a positive step change in China sentiment; leading US solar panel manufacturer First Solar (+9.7%); Spanish clean utility Iberdrola (+9.2%); and rare earths producer MP Materials (+36.8%).

The energy storage and electric vehicles segments were the key detractors at segment level for the month, notwithstanding mixed stock-specific factors. The key detractors at index level included rooftop solar developer Sunrun (-12%), electric vehicle charging network ChargePoint (-27.1%), lithium-ion battery technology developer SES AI (-40.2%), microinverter technology specialist Enphase Energy (-6.6%), electric bike manufacturer Gogoro (-51.8%).