Market Round-Up

Global solar power investment is set to outstrip spending on oil production for the first time this year, the head of the International Energy Agency (IEA) has said. Highlighting a surge in clean energy development, it stated that this will help to create a cleaner energy economy which, in turn, will help curb global emissions if the trend persists. This year, US$1.7tn is forecast to be spent on clean technologies, such as renewables, electric vehicles and low-emissions fuels, compared with US$1tn on fossil fuels. This positive shift is highlighted by the comparison with data released five years ago, where the US$2tn in annual energy investment was split evenly between fossil fuels and clean technology.

According to the IEA’s annual World Energy Investment recent report, the increased spending on clean energy is being driven by a strong rebound in economic growth following the COVID-19 pandemic, as well as concerns about price volatility and energy security sparked by Russia’s full-scale invasion of Ukraine last year. Enhanced policy support such as the US Inflation Reduction Act, which has provided US$369bn of subsidies and tax credits for clean energy technologies, has also assisted the emerging trend. As a result, the IEA has forecast annual clean energy investment to jump by 24% compared with 2021, while spending on fossil fuels will rise by 15% with total spending on clean energy investment in 2023 forecast to reach US$382bn, exceeding the US$371bn expected to be spent on oil production.

UK Gilt yields soared last week to levels not seen since the ‘mini’ budget unveiled by former Prime Minister Liz Truss and ex-Chancellor Kwasi Kwarteng. The rise followed the release of worse-than-expected UK inflation data and the prospect of a higher terminal rate. The yield on two-year gilts shot up 0.24% to 4.37% which is, excluding the Mini Budget period, the largest weekly rise in two-year gilts since June 2008.

April’s headline consumer price index (CPI) rate of 8.7% was higher than expected, despite falling from 10.1% in March. UK Inflation is now about double the equivalent US rate and is significantly higher than the Eurozone’s rate. The figure released was above both economists’ expectations of 8.2% and the 8.4% projection from the Bank of England earlier this month. While the headline figure fell, core CPI rose to its highest level since 1992, at 6.8% versus the forecasted 6.2%, while food inflation remained close to its 45-year peak at 19.1%, adding to fears that inflation is becoming entrenched and is forcing markets to increase their terminal interest rate predictions.

Markets are now pricing three full rate hikes this year, bringing the forecast terminal rate as high as 5.5%, a considerable rise from an expected peak of 4.8% at the end of April and the current 4.5% level. This expectation, which could result in further worries for mortgage holders and other borrowers, will most likely lead to a loss in profits and could choke off growth in the broader economy as businesses find borrowing more expensive. As a result, the FTSE 100 dropped by 1.9%, while the FTSE 250 index of mid-sized companies has dropped by 1.6%.

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