August 2024 market commentary

August was a positive month for fixed income investors as disappointing economic data from the US and an interest rate hike by Japan’s central bank at the beginning of the month triggered an early sell-off across global equity markets. After initial volatility, however, most markets recovered their losses with the growing belief that lower interest rates were on the horizon and that strong Q2 earnings would reduce investor fears of an economic slowdown. Earnings growth beyond the tech sector helped the S&P 500 to a 2.43% increase over the month. The Paris Olympics boosted the French service sector which helped the Euro STOXX 50 to a 1.80% increase, while real estate stocks and rate cut hopes saw the FTSE 100 post a modest 0.87% gain. Despite suffering its largest single-day points drop since 1987’s Black Friday, Japan’s Nikkei 225 recovered enough to end the month at -1.09%. 

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/08/2024 — 30/08/2024)

August market summary

Recoveries in output, new orders and employment saw the UK manufacturing sector grow at its fastest rate in two years. Despite decreasing exports, activity was driven by higher domestic demand and helped by easing price pressures. Slowing inflation, post-election political stability, improving consumer demand and increasing business investment could all help position the country for a “protracted period of above-average growth”. Elsewhere, the new government’s plan to overhaul planning rules and accelerate the building of affordable homes through their National Planning Policy Framework helped to boost the UK property market with construction scheduled to begin in the autumn. 

A rise in US unemployment from July triggered the so-called ‘Sahm rule’, an empirical indicator which predicts a recession when the three-month moving average of the national unemployment rate is 0.5% or more above its low over the last 12 months. Early market reaction to this was compounded by a slowdown in consumer demand in some areas, but a strong rebound across non-manufacturing sectors, solid retail sales figures and an apparent fall in jobless claims helped to reassure investors as the month progressed. Weaker-than-expected labour market data along with continuing soft inflation data boosted expectations that the Federal Reserve will follow through on the discussions of their July meeting and announce a rate cut in September. 

Boosts to the eurozone from Euro 2024 and the Paris Olympics were offset by weak regional earnings and uncertainty over the formation of a stable government in France. Across the bloc, the economic picture was similarly mixed. Energy-intensive industries saw some relief with falling energy prices, though some felt the effects of reduced demand from China. Construction suffered and hitherto low unemployment began to rise, but solid household income growth and lower financing costs helped to rebalance growth expectations. 

Government launches ‘rapid review’ of legally binding domestic environment targets 

The Department for Environment, Food and Rural Affairs (Defra) pledged to review targets to cut waste and improve air quality, water and biodiversity after repeated warnings from nature charities and the Office for Environmental Protection that current ambitions and delivery strategies were insufficient to meet the scale of the UK’s environmental challenges. The review will include input from civil servants, academics, conservationists, and experts in farming, resources, and waste and water management.

UK conservation watchdogs have long argued that nature recovery targets under the Environment Act are undermined by a lack of scientific clarity. Annual reports on the government’s Environmental Improvement Plan (EIP) also indicate that projects to enhance natural habitats, improve water quality and limit the impacts of water stress have made little or no progress. Defra’s review coincides with a new government initiative to reform the water sector by tackling widescale sewage pollution, ringfencing significant infrastructural investment, and prioritising consumer and environmental interests. 

The review also comes as the Institute for Public Policy Research (IPPR) warns that without swift action, the UK risks falling short of its legal duty to halt species decline and protect 30% of its land and sea by 2030. The IPPR’s August report Driving ‘Natural’ Renewal estimates that less than 3% of England’s land and 8% of its seas are currently under effective protection – with just over half of its biodiversity thought to be intact, the UK remains one of the most nature-depleted countries in the world.

Global renewable capacity forging ahead

During the summer, the world’s major economies recorded some major milestones in the development of renewable energy generation, capacity, and technologies.

Despite relatively poor weather at home, the UK is on track to generate record levels of solar power this summer with output outstripping the previous summer record (2022) by 16%. Generation is set to increase further with the government greenlighting three new solar farms for eastern England. The government is also planning to raise the budget for the year’s renewable energy auction to £1.5 billion, the majority of which will be used to develop offshore wind power. Elsewhere, the UK achieved a milestone of 250,000 certified heat pump installations after a 73% increase in Boiler Upgrade Scheme applications between January and June.

The UK government is planning to raise the budget for the year’s renewable energy auction to £1.5 billion, the majority of which will be used to develop offshore wind power.

In the EU, wind and solar energy overtook fossil fuels to generate 30% of the bloc’s electricity during the first half of 2024. Power generation from coal, oil and gas fell 17% during the same period, and EU power plants burned 24% less coal and 14% less gas since the first half of 2023 . Wind-generated electricity also established a new record in the US, exceeding coal-fired generation for two consecutive months – from producing 2.4GW of capacity in 2000, US wind power was generating 150.1GW by April 2024 . Increasing its own wind and solar capacity in July, China expanded its total capacity to 1,206GW, surpassing a 1,200GW clean energy target president Xi Jinping initially set for 2030. 

A report published in August by BloombergNEF found that global investments in renewables continue to outpace fossil fuels and that over 40% of the world’s electricity supply came from zero-carbon sources in 2023.

Global investments in renewables continue to outpace fossil fuels and over 40% of the world’s electricity supply came from zero-carbon sources in 2023.

Government elects not to challenge judicial reviews against UK oil and gas development  

Climate action groups have welcomed the government’s decision not to challenge judicial reviews brought against prospective offshore oil and gas developments in the North Sea. While the move has no bearing on drilling licences, it means the government will not contest a recent judicial review brought by campaign groups Greenpeace and Uplift to stop the development of the untapped Rosebank and Jackdaw fields – should the review back the campaigners, operators looking to exploit the fields would need to cost in and resubmit environmental assessments.

Greenpeace and Uplift challenged the exploration approvals granted by the previous government arguing that ignoring the downstream impact of emissions from burning extracted fossil fuels was incompatible with the UK’s domestic and international climate obligations. The current government’s decision was further influenced by the supreme court’s landmark Finch ruling in June which determined that planning authorities must assess downstream emissions of a fossil fuel extraction project before granting planning permission under the Environmental Impact Assessment Directive. 

The government insists their decision will save taxpayer money but stress that it won’t lead to the withdrawal of current operating licences. They will nevertheless take initial steps later in the year to implement their manifesto position not to issue any new exploratory oil and gas licences.