UK inflation held at 6.7% in October, remaining the highest rate in the G7. However, while petrol and diesel costs continued to keep the rate high, food and non-alcoholic drinks prices fell for the first time in over two years. The Bank of England held the base rate at 5.25% but remained cautious on the wider economy, downgrading their 2024 growth forecasts.
October 2023 market commentary
The Israel-Hamas conflict, rising bond yields and the likelihood of ‘higher for longer’ interest rates all weighed heavily on market sentiment during October. This resulted in negative returns across equity and bond markets. The tragic events in the Middle East coupled with fears of regional escalation drove investors towards commodities, with gold and oil prices rallying as a consequence. As all major indices felt the effects, the S&P 500 fared the best, falling by 2.1%. Elsewhere, the Euro STOXX 50 fell 2.63%, the FTSE 100 dropped back 3.69%, and the Nikkei 225 posted negative returns for the third consecutive month.
(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/10/2023 – 31/10/2023).
October markets overview
Inflation looked to be stabilising in the US with consumer price growth falling to 3.7%. However, a stubbornly resilient jobs market, geopolitical tensions abroad, and the unwavering commitment of the Federal Reserve to its 2% inflation target left investors concerned that ‘higher for longer’ might hold the door open to future rate hikes. This combined with buoyant economic data and lingering concerns about the state of government finances drove the US 10-year Treasury yield above 5% for the first time since 2007. The increase is bad news for US consumers as the yield serves as a benchmark for consumer borrowing rates.
UK inflation held at 6.7%, remaining the highest rate in the G7. However, while petrol and diesel costs continued to keep the rate high, food and non-alcoholic drinks prices fell for the first time in over two years. The Bank of England held the base rate at 5.25% but remained cautious on the wider economy, downgrading their 2024 growth forecasts. This caution was reflected in UK manufacturing data for October which showed British factories struggling with volatile market conditions and reduced orders.
While inflation in the eurozone fell below 3% for the first time since 2021, a 0.1% fall in collective GDP and the continuing aftershocks of the energy crisis sparked concerns that the region risked falling into recession. Manufacturing and service activity in the eurozone declined further in October and the downward trajectory looks set to continue with falling demand for goods and services and a significant drop in consumer and business spending.
The Israel-Hamas conflict
Assessing the Israel-Hamas conflict’s impact on global markets may seem trivial in the context of an escalating human tragedy, but we believe it’s important to evaluate all forms of risk for their financial and economic implications. Geopolitical risks can be far-reaching and unpredictable – ever mindful of the devastating human impacts, we will continue to monitor the situation in the Middle East to prepare for any associated effects on global markets.
COP28 – keeping the 1.5°C goal alive
The 28th United Nations Climate Change conference (COP28) will be held in Dubai from 30 November to 12 December.
Against a backdrop of record global climate extremes, COP28 faces significant challenges to ensure policies and financial commitments are ambitious enough to keep the world on track to limit global temperatures to 1.5°C above pre-industrial levels by 2100.
The World Meteorological Organisation predicts that annual mean global temperatures between now and 2027 will be 1.1°C to 1.8°C higher than the 1850-1900 average. Concentrations of atmospheric CO2 emissions are currently 50% higher than in pre-industrial times, and a recent synthesis report by the UN’s Framework Convention on Climate Change showed a consensus among governments that past climate action had been insufficient to close the emissions gap or limit global warming.
The first global stocktake – a comprehensive assessment of climate progress since the 2015 Paris Agreement – will show that the world is off track to meet its 1.5°C target. Achieving peak global emissions by 2025 is also less likely. With global finance and political support currently directed predominantly towards mitigation of further climate impacts, COP28 presents an opportunity to secure increased commitment to and funding for climate adaptation technologies and solutions. Article 6 of the Paris Agreement which covers national and cooperative climate commitments will also be a key discussion point – delegates will look to agree on the conditions for a global carbon market and decide whether emissions avoidance should be an eligible strategy alongside emissions removal.
Global finance flows and funding access for environmental loss and damage are also expected to be prominent agenda items with a growing expectation that the $100 billion annual funding target to support climate action in developing nations will be met in 2023.
EU parliament includes nuclear and sustainable fuels as eligible net zero technologies
The European Commission’s Net Zero Industry Act is a proposed regulation aimed at scaling up the development and manufacture of technologies supporting the EU’s net zero ambitions. Similar to the US Inflation Reduction Act, the EU’s proposal looks to simplify regulatory frameworks and accelerate investment in clean energy solutions.
Having initially focused its attention on “strategic” technologies such as solar, battery storage and heat pumps, a parliamentary industry committee voted on 25 October to expand its list of eligible technologies and green light all available nuclear and sustainable fuel options. While the inclusion was supported by pro-nuclear MEPs and proponents of eFuels and biogas, green activists argued the decision risked diluting investments in key green technologies.
Should Member States ratify the Act, a benchmark will be set for the manufacturing capacity of net zero technologies to meet at least 40% of the EU’s annual energy needs by 2030.
Similar to the US Inflation Reduction Act, the EU’s proposal looks to simplify regulatory frameworks and accelerate investment in clean energy solutions.
EU pledges to make wind-powered clean energy a “European success story”
The European Commission’s State of the Union address in September highlighted a variety of challenges facing the region’s wind industry as it works to double its installed capacity by 2030. With all major European turbine manufacturers reporting significant operating losses in 2022, a new European Wind Power Action Plan was developed to build on existing industry legislation and address challenges in six key areas: accelerated deployment; standardised project design; improved access to finance; fair and competitive international markets; the development of regional net zero skills academies; and improved engagement with wind industries and Member States.
To finance increased wind capacity, the Action Plan proposes doubling the money available for clean technology manufacturing from the EU Innovation Fund to €1.4 billion. The European Investment Bank has pledged to provide de-risking guarantees to private banks lending to the wind industry and has changed its own lending policy to better support financing-related manufacturing.
The Action Plan also aims to limit the incursions of Chinese turbine manufacturers, winning orders across Europe with cheaper deals unfairly subsidised by the Chinese government.
To finance increased wind capacity, the Action Plan proposes doubling the money available for clean technology manufacturing from the EU Innovation Fund to €1.4 billion.
UK Energy Act passes into law “to power Britain from Britain”
The UK Energy Act 2023 passed into law on 26 October “laying the foundations for an energy system fit for the future”.
Representing the most comprehensive energy legislation in the country’s history, the Act aims to enhance energy security, promote national net zero ambitions, and ensure long-term energy affordability for consumers. Measures have also been taken to scale up the development of offshore wind capacity and unlock £100 billion of private investments to finance energy infrastructure and green jobs.
Cost efficiency is a key factor in consumer affordability. By fostering competition in the UK’s onshore electricity networks through a revised tendering process, consumers could save up to £1 billion on energy bills by 2050. A new merger regime will also be implemented for energy networks to ensure consumers are protected against negative impacts – this is projected to save consumers around £420 million over the next decade.
By fostering competition in the UK’s onshore electricity networks through a revised tendering process, consumers could save up to £1 billion on energy bills by 2050.