July 2023 market commentary

Global market sentiment stayed positive in July and hopes of a soft landing increased as developed market inflation eased, global equities delivered positive returns, and Gross Domestic Product (GDP) data appeared more resilient than expected. Strong corporate earnings and rallying energy stocks saw gains for US indices with the S&P 500 in particular closing the month up 3.21%. The FTSE 100 also made a modest monthly gain of 2.35% while cautious hopes of recovery across the major eurozone economies and a marginal drop in regional inflation saw the Euro STOXX 50 end July up 1.77%. 

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/07/2023 – 31/07/2023) 

July markets overview

Having paused its rate-hiking cycle in June, the Federal Reserve raised interest rates by 25 basis points to a range of 5.25%-5.5%, its highest in 22 years. While US inflation fell to 3%, core inflation remains high, driven largely by a post-pandemic surge in the housing market which has only recently started to ease. Despite falling to its lowest level since March 2021, US inflation still remains above the Fed’s 2% annual target rate.

The European Central Bank (ECB) also hiked interest rates by 25 basis points. This is a ninth consecutive rise which has seen the ECB’s benchmark deposit rate increase from -0.5% to 3.75% in a year — the fastest accumulative increase since the adoption of the euro. With the ECB also targeting a 2% annual rate of inflation, the eurozone’s economy has experienced a contraction in two consecutive quarters. ECB president Christine Lagarde stated that while the economic outlook for the eurozone may remain weak in the short term, falling inflation and rising incomes will contribute to its recovery.

Despite UK inflation falling further than expected to 7.9%, the Bank of England voted to hike rates for the 14th consecutive time. However, investors now widely believe that the base rate will peak at 5.75% in early 2024 against a previously predicted high of 6.5%. For many homeowners coming off low-percentage mortgage deals, there was some hope of respite when several big-name lenders announced rate cuts on many of their fixed-rate mortgage deals. Financial data specialists Moneyfacts determined that average two- and five-year fixed rates had decreased day-on-day for the first time since May.

Amid widespread criticism for failing to address the prolonged impact of inflation, the Bank of England commissioned ex-Federal Reserve chairman and Nobel Prize-winner Dr Ben Bernanke to lead a review of the Bank’s forecasting and related processes. Beginning shortly, the review will conclude in early 2024 with its findings expected to be published in the spring.

2023: the world’s hottest year?

Sustained heatwaves affecting the US, southern Europe and China are set to make July 2023 the world’s hottest month in “hundreds, if not thousands of years”, according to senior NASA climatologist Gavin Schmidt. The University of Maine’s Climate Reanalyzer monitoring platform registered record-breaking global average temperatures on consecutive days at the beginning of the month, and independent analysis by environmental data specialists Berkeley Earth predicted that there is now more than an 80% chance that 2023 will be the hottest year on record.

Extreme heat has also affected marine environments with average global ocean temperature records broken and sea surface temperatures reaching all-time highs – localised heatwaves and surface temperature anomalies in the North Atlantic, for example, have been categorised by the National Oceanic and Atmospheric Administration as “beyond extreme”. Increased ocean warmth may have an adverse effect on marine ecosystems which produce half of the planet’s oxygen. It may also be partly responsible for a drastic decline in Antarctic sea-ice coverage which has contracted 1.6 million square kilometres further beyond a record low set in 2022.

COP28 – taking stock of global emissions

Sultan Al Jaber – president of November’s United Nations Climate Change Conference (COP28) in the UAE – announced the details of his long-awaited climate action plan which divides the objectives of the 2015 Paris Agreement into four fundamental goals or “pillars”: fast-tracking the low-carbon transition; fixing climate finance; focusing on people, lives and livelihoods; and full inclusivity. Al Jaber also announced that the commitment to limit global temperatures to 1.5C above pre-industrial levels would be maintained.

For the first time, governments will conduct a “global stocktake” of emissions to see how far they have progressed with the nationally determined contribution (NDC) commitments they made in Paris. The results are likely to show that the world is significantly off track, but rather than highlight individual failings, the COP presidency has given countries until September to submit revised NDCs sufficient to meet the 1.5C goal. Al Jaber emphasised that this increased effort would entail the “inevitable and essential” phasing down of fossil fuels. 

He also called for “a comprehensive transformation” of the global finance system to improve access to capital and ensure that longstanding commitments to support low-carbon transitions in poorer countries are met. In particular, Al Jaber is looking to finalise a fund for climate-related loss and damage agreed at COP27 last year, which he hopes to make accessible to countries most affected by the climate crisis shortly after COP28.

Nature restoration passes into EU law

The European Green Deal received an important boost as the EU finally agreed to pass a nature restoration law placing recovery measures on 20% of the region’s land and sea by 2030 and all damaged and degraded ecosystems by 2050. A report by the European Environment Agency published in May found that 81% of protected habitats, 39% of protected birds and 63% of other protected species were in a “poor or bad” state. It also determined that protected areas in the EU were insufficient in scale and poorly managed, estimating that “at least” 259,000 square kilometres of protected habitats required restoration.

Opponents of the new law argued it would negatively impact food producers and overall food security. As a consequence, a proposal to restore agricultural ecosystems was cut and a pre-implementation assessment of regional food security was agreed. An open letter signed by 6,000 scientists across EU member states rejected opponents’ concerns as “misinformation”, insisting that restoring nature would improve food security by protecting farmlands and fisheries while also providing new employment opportunities and cost-saving innovations.

The EU finally agreed to pass a nature restoration law placing recovery measures on 20% of the region’s land and sea by 2030 and all damaged and degraded ecosystems by 2050.

Deep sea mining legislation on hold, for now…

A decision by the International Seabed Authority (ISA) to greenlight licences for industrial-scale deep-sea mineral extraction was delayed after pressure from environmentalists and governments opposing the action. Despite efforts by mining companies to establish regulations and open up mining rights by 2024, the ISA concluded that it needed more time to finalise seabed mining rules and environmental standards. Environmentalists aim to use the time to mobilise additional support to prolong the delay or even force a moratorium on global seabed mining.

Prior to the ISA’s July assembly, Greenbank joined a group of 37 financial institutions representing over €3.3 trillion of assets in becoming a signatory to the Global Financial Institutions Statement to Governments on Deep Sea Mining. Coordinated by the Finance for Biodiversity Foundation, the joint statement urges governments not to proceed with deep sea mining contracts until all associated risks have been considered and alternative resources explored.

The ISA concluded that it needed more time to finalise seabed mining rules and environmental standards.

Renewable electricity surges

The International Energy Agency’s (IEA) latest Electricity Market Report update indicates an accelerating “structural decline” in global fossil fuel-generated electricity. If weather conditions are favourable, the report predicts that renewable generation could outstrip coal by 2024. The share of renewables in global electricity generation is forecast to exceed one-third for the first time in 2024, and renewable electricity alone is expected to meet a predicted increase in global demand.

The report also indicates that global power generation emissions are set to dip slightly in 2024, with increased emissions in China and India more than offset by steeper declines in other regions.