October 2024 market commentary

In the shadow of the looming US election (see update below) major equity markets suffered a volatile October with persistent growth risks continuing to dampen investor optimism. Speculation regarding the content of the UK’s autumn budget and the possibility of post-election policy changes in the US also contributed to a month of largely negative returns. The Euro STOXX 50 fell back 3.31%, the FTSE 100 dropped 1.45%, and despite signs of resilience in the US economy, the S&P 500 ended October down 0.91%. While the election defeat of Japan’s ruling coalition threatened wider political and economic instability, the Nikkei 225 finished the month up 3.07%.

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/10/2024 — 31/10/2024)

October market summary

The UK’s autumn budget revealed higher-than-expected levels of short-term spending with tax rises slated to plug what chancellor Rachel Reeves called an inherited £22 billion ‘black hole’ in public finances. Changes to Labour’s self-imposed borrowing rules also allowed the chancellor to announce significant funding increases for UK infrastructure – among the core recipients, the NHS is set for its biggest hike in funding since 2010. However, the government's promise to make the UK the fastest growing developed economy was undermined by the Office for Budget Responsibility (OBR) who observed that the growth measures outlined in the budget speech would leave domestic GDP “largely unchanged in five years”. The OBR further estimated that GDP growth would taper off after a projected 2% rise in 2025. Elsewhere, headline inflation fell below the central bank’s 2% benchmark to 1.7%, driven largely by falling fuel and air fare costs.

Signs of longer-term resilience in the US economy were boosted by growth data indicating that domestic GDP had increased by almost 3% over the third quarter. Strong earnings from the banking sector helped to offset mixed results from tech companies. Sticky core inflation after the Federal Reserve’s rate cut in September saw policymakers err on the side of caution regarding future rate cuts against their dual mandate of stable prices and labour markets. Elsewhere, global growth forecasts by the International Monetary Fund were accompanied by a warning that a Republican victory in the US election could lead to a significant contraction in projected output – Donald Trump had outlined plans to impose large tariffs on imported goods which could trigger retaliatory actions from major trading partners.

Responding to signs of faltering economic momentum in the eurozone, the European Central Bank announced its first back-to-back interest rate cut since the height of the European debt crisis in 2011. Consumer spending, manufacturing output and investment are all down across the bloc and some of its major economies are struggling to negotiate the slowdown: Germany is on the brink of a recession, Italy’s recovery from record inflation has stalled, and growth in France is expected to contract post-Olympics. Policymakers at the central bank nevertheless remained confident that the rate cut would boost stimulation and continue to control regional inflation.

EU postpones deforestation law after pressure from businesses and trading partners

A new EU regulation requiring exporters of commodities such as timber, palm oil and coffee to prove that their production did not contribute to deforestation was postponed by the European Commission for 12 months after international suppliers and trading partners called for more time to assess operational impacts and issues with cross-border compliance.

Designed to prevent EU consumer demand from exacerbating environmental degradation outside the bloc, the Regulation on deforestation-free products faced significant opposition from leading commodity producers and farming lobbies who claimed that delays in the issuance of relevant documentation left them less time to prepare and adversely affected transitional support. Businesses and industry groups within the EU warned of shortages and price increases for staple goods while global trading partners including Brazil and India accused the Commission of protectionism. Indonesia – the EU’s biggest palm oil supplier – raised the point that producers faced problems providing regulators with sufficient geolocation data on planted and harvested sites as the country has strict national security laws prohibiting the sharing of data on agricultural land and concession boundaries.

Environmentalists and forest protection     campaigners accused the Commission of diluting a key achievement of the European Green Deal, arguing that the slow pace of implementation would see deforestation products circulating in European markets for at least another year.

Revised cost estimates suggest green hydrogen could be a ‘prohibitively expensive’ carbon abatement strategy

A Harvard study on alternative energy sources published in scientific journal Joule estimated that the cost of producing green hydrogen may not be economically viable for multiple sectors, with carbon abatement costs in some cases exceeding those of direct atmospheric removal. 

Generated by electrolysis using renewable energy, green hydrogen gained significant traction as a potential solution for decarbonising heavy emissions industries, but the Harvard study indicated that previous cost estimates overlooked significant and variable supplementary storage and delivery charges. The inclusion of these additional costs led the study to conclude that even with production costs decreasing in the future, there may still be a limit to the economic and industrial opportunities for green hydrogen.

Despite the logistical challenges, the study predicted a role for green hydrogen in a decarbonised energy system but emphasised the importance of concentrating global investment in a broad range of low-carbon strategies.

EU votes to push ahead with increased tariffs on Chinese electric vehicles

Citing the need to compensate for the Chinese government’s ‘injurious’ industrial subsidies, the EU voted to impose tariffs of up to 45% on the country’s electric vehicle exports. Rejecting China’s claim that the EU was favouring protectionism without tangible evidence of state interference in the Chinese EV industry, the bloc agreed to add the new duties to an existing 10% tariff on Chinese cars and enforce them for the next five years.

The framework aims to avoid the monitoring, transparency and rights violations issues identified in carbon credit markets and prioritise good governance, fairness and inclusivity. 

The tariff vote divided EU member states with Germany and Hungary pushing for a negotiated solution to avert a protracted trade dispute. European car manufacturers have struggled with challenging regulation developed under the bloc’s Green Deal and the influx of lower-priced Chinese EVs – Volkswagen plans to shut down at least three German production plants (the first closures in the company’s 87-year history) and every major manufacturer bar Renault issued profit warnings during the year. The European Commission nevertheless insisted that tariff increases were introduced to ensure a level playing field in Europe, not to restrict trade with a valued partner. Beijing contends that the move violates international trading laws, threatens the progress of obligatory climate commitments, and risks “sabotaging a global green partnership for political gain”.

Cop16: the gap between biodiversity finance and future needs widens

Ahead of the 16th meeting of the UN Convention on Biological Diversity in Cali, Colombia, data analysts BloombergNEF (BNEF) warned that the biodiversity financing gap had widened to $942 billion with investment increases failing to keep pace with global inflation. 

The Cop16 edition of BNEF’s Biodiversity Finance Factbook found that while annual financial flows had grown to $208 billion, a five-fold increase would be needed to achieve an annual target of $1.15 trillion by 2030. An increase in publicly financed biodiversity-related overseas development assistance and record-level debt-for-nature swaps through 2023 was counterbalanced by a rise in environmentally harmful subsidies and a drop in privately financed green bonds and carbon offsets. News of the investment shortfall coincided with BNEF reporting elevated risks to biodiversity in more than two-thirds of researched geographies, driven largely by the growth in nature-dependent industries. BNEF’s global threat index has increased by five percentage points since 2021 and Cop16 hosts Colombia have become one of the world’s top five funding priorities.

In response, the International Advisory Panel on Biodiversity Credits (IAPB) launched a new framework to close the biodiversity finance gap, develop ‘high integrity’ biodiversity credit markets, and scale up private sector investment. The framework aims to avoid the monitoring, transparency and rights violations issues identified in carbon credit markets and prioritise good governance, fairness and inclusivity. With some environmental groups questioning the transformative value of credit offsetting, the IAPB clarified that credits should not be a means to “justify impacts that should have been avoided or minimised”.

The framework aims to avoid the monitoring, transparency and rights violations issues identified in carbon credit markets and prioritise good governance, fairness and inclusivity.

November US election result update

With Donald Trump set to return to the White House in February 2025, what might this mean for sustainability issues, and climate action in particular?

During his first term, Trump was a vocal climate sceptic and took various steps to roll back climate regulation, including pulling the US out of the Paris Agreement on climate change. He maintained this position in the lead up to the 5 November election, with the mantra ‘drill, baby, drill’ being used to emphasise his pro-fossil fuel, anti-climate stance. But while a second Trump presidency is likely to slow the pace of the USA’s clean energy transition, we do not believe that it will halt action entirely. 

There is some uncertainty over how much of the Inflation Reduction Act’s (IRA) spending is at risk and the impacts this will have on different aspects of the green economy. Much of the IRA spend is being disbursed in Republican congressional districts, which means that a full IRA repeal could be opposed by many Republican lawmakers or else would likely be replaced with other spend. 

We therefore see a partial repeal as the more likely outcome, with incentives targeting residential energy efficiency improvements and more nascent technologies such as hydrogen most at risk. The picture on other areas such as support for electric vehicles (EVs) is also more mixed, with greater variation expected at a state level (for example California has invested significantly in EV charging infrastructure which provides ongoing structural support for growth in EV penetration). 

The degree to which Trump’s re-election shifts the dial in terms of global ambition and policy action on climate change will likely become clearer during the COP29 climate talks scheduled to begin in Baku in a few days’ time. With the US potentially withdrawing from the UN Framework Convention on Climate Change (which would result in it being removed from participation in future COP negotiations), all eyes will be on the EU and China to see how actively they will step up to fill the leadership gap. 

You can find our reflections on broader economic and fiscal implications of a second Trump presidency here.