December 2023 market commentary

The end of the year brought welcome gains for global equity markets as inflation concerns receded. In Dubai the final COP28 text resulted in the first explicit demand to "transition away" from fossil fuels, and a UK carbon pricing levy is set to support the drive towards decarbonisation.

By 8 January 2024

Global equity markets again fared well in December with all major indices posting gains. The S&P 500 ended the month up 4.54% while the FTSE100 and Euro STOXX 50 rose by 3.85% and 3.22% respectively. Japan’s Nikkei 225 posted a more modest gain of 0.09% for December but still ended the year up almost 31%. While central banks pledged to continue watching for signs of inflation persistence into 2024, the ‘higher for longer’ interest rate mantra was challenged by sharper-than-expected falls in headline rates.

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/12/2023 – 29/12/2023).  

December markets overview

The Federal Reserve held interest rates for the third consecutive time while the Federal Open Market Committee indicated that their policy tightening campaign had ended. Changing monetary policy, the increased likelihood of earlier interest rate cuts, and positive news about US economic resilience led to one of the biggest post-meeting rallies across assets in recent years. Fed officials acknowledged the easing of core inflation during 2023 and now see it falling year-on-year to their 2% baseline target in 2026. The Fed also observed that while economic growth had slowed since the increased pace of the third quarter, US GDP was still on track to grow around 2.5% for the year.

A market rally in the UK also followed news of a sharp drop in headline inflation to 3.9%, its lowest rate since September 2021. Cheaper petrol and reduced food inflation were core contributors, triggering speculation that interest rates would begin falling early in 2024. Despite the Bank of England’s insistence that it’s too soon to start reducing the cost of borrowing, weak economic growth figures and the Bank’s own recent warning that the country faces a “50-50” chance of a recession in 2024 increased market expectations of a future shift in monetary policy.

While the European Central Bank (ECB) cut its inflation forecasts for 2023 and 2024, it continued to push back on market predictions that rates could begin falling as early as March. Policymakers insisted they would keep borrowing costs at “sufficiently restrictive levels for as long as necessary”, suggesting that continued severity could see the eurozone hit its inflation target earlier than expected. However, some analysts believe that the ECB’s position will be difficult to maintain if the Fed votes to cut rates early in 2024.

Weak economic data at the year’s end also caused the ECB to trim its growth forecasts for the eurozone from 0.7% to 0.6% for 2023 and from 1% to 0.8% for 2024.

COP28: key agreements and positive markers for a net zero future

The first Global Stocktake gave a clear indication of scale and urgency for limiting the increase in global temperatures: “deep, rapid and sustained” emissions reductions of 43% by 2030 and 60% by 2035, relative to 2019 levels. Countries are now better placed to develop more effective climate action plans by 2025 and convert pledges into real-economy outcomes.

While the final agreed conference text at COP28 avoided calling for the “phase out” of fossil fuels, it nevertheless made the first explicit demand to “transition away” from their use in global energy systems. The transition text may not have pleased all parties, but the conference closing statement recognised the significance of “the world… no longer denying our harmful addiction to fossil fuels”. 

Consensus was also reached on making the global environmental loss and damage fund, initially discussed at COP27, operational. Additionally, the UN Office for Disaster Risk Reduction and the UN Office for Project Services agreed to host the secretariat of the Santiago network for loss and damage – a platform that facilitates technical assistance for developing countries most vulnerable to the effects of climate change.

Elsewhere, commitments were made to triple global renewable energy capacity and double the average rate of energy efficiency improvements by 2030. The accelerated phasing out of inefficient fossil fuel subsidies was called for and new climate financing systems were introduced. The UAE committed $30 billion to their new ALTÉRRA fund which eventually aims to mobilise $250 billion of private finance climate investments annually to transform emerging markets and developing economies. Multilateral development banks (including the World Bank and the Asian Development Bank) also announced a $180 billion multi-year climate finance commitment which promised to deliver a common approach to climate reporting, support regional decarbonisation and climate resilience efforts, and create common principles for tracking nature-positive finance.

While the final agreed conference text at COP28 avoided calling for the “phase out” of fossil fuels, it nevertheless made the first explicit demand to “transition away” from their use in global energy systems.

Future UK carbon pricing levy set to support decarbonisation drive

From 2027, imports of iron, steel, aluminium, ceramics and cement from countries with weaker climate regulations will be subject to a levy to ensure price compatibility with materials produced in the UK. While the levy works to prevent UK manufacturers being undercut by foreign exporters of highly traded, carbon-intensive goods, it also aims to reduce the risk of ‘carbon leakage’ – carbon-intensive production and associated emissions being displaced to countries with lower or negligible carbon prices. The ultimate aim is to ensure the integrity of domestic decarbonisation policies and provide UK industry with the certainty it needs to accelerate its investment in decarbonisation and contribute to true net reductions in global emissions.

While industries largely support the protection of UK manufacturers, representative bodies such as Make UK have criticised the delay in implementation which they argue should align with the EU’s own ‘Carbon Border Adjustment Mechanism’ scheduled for 2026. Trade body Steel UK have also expressed concern that the UK steel industry could be exposed to high-emission imports if the government’s implementation timetable doesn’t mirror that of the EU’s. In response, the government has insisted the delay is necessary for businesses to prepare for the new pricing scheme.

UN Food and Agriculture Organization (FAO) publishes roadmap for ending global hunger within climate threshold

In 2022, the FAO reported that 738.9 million people worldwide faced hunger. Additionally, almost 2.4 billion people were moderately or severely food insecure while poverty adversely affected the diets of over 3.1 billion people. But improving global food security is a significant challenge: intensifying food production risks endangering climate and biodiversity goals; curbing it risks increasing global hunger and malnutrition. 

The Food and Agriculture Organization has proposed an integrated strategy to create climate-friendly food systems which contribute to the eradication of hunger without breaching the Paris Agreement’s 1.5°C temperature threshold.

The FAO has therefore proposed an integrated strategy to create climate-friendly food systems which contribute to the eradication of hunger without breaching the Paris Agreement’s 1.5°C temperature threshold. Initiated at COP28, the FAO’s roadmap will spend the next three years exploring ways to sustainably boost crop and livestock yields, reduce agricultural emissions and food waste, increase sector resilience, and promote diets rich in plant-based foods. Through these explorations, the FAO aims to develop a range of transformative projects which will form the basis of concrete investment and policy packages by COP30.