Monday Digest
Posted 9 December 2024
Focus turns to Europe
Global equity markets gained about 1% but, despite Europe’s political turbulence, both French and German equity markets are beating most of the rest; Sterling has gained against most currencies. Bonds marked time ahead of central bank rate decisions in the run up to Christmas, although US bond prices put in a late spurt.
US investors remain very bullish and since the election, overseas investors have also bought substantially into US-listed stocks, helping to drive the general US stock outperformance.
The US is a crowded market, and highly valued and we think there is a mild danger in the optimism. US investors expect rapid policy enaction but that also raises the possibility of missteps.
French political turbulence reached a new height with the collapse of Prime Minister Barnier’s minority government. His caretaker government, meanwhile, is paralysed. President Macron who will announce a new Prime Minister in ‘days’, met with Trump at the weekend, likely to gauge how likely his threat of EU tariffs and future US China relations. Europe needs China to have a deal with the US so it’s not forced to choose between its most important markets.
It’s very difficult to keep confidence up while there is a decline in exports markets, so European leaders want to grow exports and maintain private sector spending to reduce government deficits.
A fall in the euro would help but tariffs require a sharp decline in the currency to offs increased trade costs. If tariffs can be avoided domestic demand should be stabilised by lower interest rates and a reasonably small fall in the currency.
Next week’s ECB meeting is therefore extremely important. The potential for a hit to confidence and growth because of trade disruption is going to mean a rate cut, and there is some hope that the central bank could cut by 0.5%.
It was notable, however, that the French equivalent of the FTSE 100, the CAC-40, rose nearly 3% and the German DAX-40 is up 4%, but there is little room for sentiment to go lower.
November asset returns review
November saw welcome gains in broad global equity and bond indices but those averages disguise very different performances across the world.
The most significant factor was the US presidential election. Putin’s warnings about nuclear conflict worried us, and energy prices edged higher in Europe. US consumers and businesses appeared confident, in direct contrast to many Brits and Europeans.
Some markets may have been helped by the removal of some US political uncertainty, but exporting countries were hurt by the prospect of more isolationism.
US equities moved sharply higher in the aftermath with the largest stocks benefitting most. In sterling terms. In comparison, non-US equity markets were unchanged on average.
Investors, especially in the US, appear convinced that Tump will be good for US economic growth. However, there is concern that he could worsen the fiscal deficit, while his tariffs create the potential for higher inflation and he has already signalled more trade conflict, threatening 25% tariffs on Mexico and Canada and an additional 10% on China. This fed into bond markets pushing US bond yields up.
Government deficit concerns also affected Europe and especially France. UK gilt yields also moved higher, as bond traders seem to consider that UK inflation is more closely linked with the US.
UK equity markets ended the month with over 2% gains. International equity markets in local currencies were generally higher although currency moves generated differential performance.
Trade-sensitive areas such as the Emerging Markets and Europe fared relatively poorly. European equities rose +0.2% in euro terms but were down 1.5%. The euro was one of the worst performing currencies at -1.7% versus sterling. China’s equity markets fell, with the MSCI China index ending the month -3.4% in sterling terms, with the Reminbi fall versus sterling contributing -0.7%.
Economists became more pessimistic over the month, as did the Bank of England and the European Central Bank. Despite inflation in the UK being a little higher than expected the BoE cut 0.25% and the ECB strongly signalled its intention to cut on December 12th.
China ended November with the MSCI China index at -3.4% hurt by fears of Trump’s policies. Nevertheless, its large tech companies posted stronger results. China also showed some signs of improvement with a rise in lending and its central bank has moved to a clearly dovish stance, helping some Chinese bond yields to fall to levels similar to Japan and Germany.
Commodities were broadly unchanged. Oil remained in a tight trading band, while wider European energy costs moved a little higher. Geopolitics threatened near-term supply but were countered by slackening global demand and potential US production increases.
The Future of Carbon Credits
Carbon trading is in a precarious position. Despite world leaders at COP29 agreeing to launch global carbon markets worth billions of dollars, prominent businesses are increasingly abandoning voluntary carbon markets – HSBC recently abandoned its plan to build a carbon credit desk, and US airline Delta has left the market. Trust in the system is low, and political pressure is turning against the green movement. Donald Trump has promised to slash environmental regulation in upcoming presidency – a problem those at COP26 were keenly aware of. Can carbon trading survive?
Carbon trading aims to align market forces with global environmental transition by incentivising carbon reductions through market forces.
There’s a difference between mandatory and voluntary markets. EU ETS gives out certificates that allow companies to emit. These can be traded in secondary markets, and are destroyed when they get handed in. Hope is that these are eventually auctioned and scaled down to reach net zero.
Voluntary markets are about offsets through “carbon credits” but these only work if there’s a mandatory market in the background and there needs to be centralised verification that offsetting is actually happening.
The market grew massively, but significantly slumped last year, in Europe pressure is driven by fears about “greenwashing” and fraud, and in the US it’s more about war on woke.
The basic problem is that projects to offset emissions are being mis-sold with poor oversight. This is exacerbated by government-guaranteed rush into carbon credits, meaning companies didn’t need to do much to get funding for green projects.
Consistent international regulation is needed ,which is why the COP29 agreement is a positive but perhaps too little and too late.
The worry is that carbon trading is already ailing, and might be smashed to pieces by Trump. But there’s a sense that he can only slow the green transition, not stop it. His premiership might slowing progress, but the train is motion.
That doesn’t necessarily mean carbon trading has a place in the transition. Carbon trading has always had serious flaws and has needed reform. Voluntary markets need strong consistent oversight and robust mandatory markets underpinning them. The hope is that recent problems will force that change.