February 2024 has been marked as the hottest February on record, marking the ninth consecutive month of record-breaking high temperatures. What does this mean for the global economy?
- February 2024 officially recorded as the hottest February on record
- US 10-Year Treasury yields dip to one-month low
- Equity markets focus on earnings and data
- Oil prices soar 2.5% since mid-week; gold continues its climb
- US Dollar Index hovers near one-month low
THE ECONOMIC IMPACT OF CLIMATE CHANGE: A LOOMING GROWTH CONCERN
In recent years, the relentlessness of climate change has become increasingly evident, with each passing month bringing new record-highs in global temperatures. February 2024 marked the ninth consecutive month of record-breaking high temperatures, capping off the Northern Hemisphere’s hottest meteorological winter. The Copernicus Climate Change Service reported that February’s global surface temperature surpassed the previous record set in 2016, highlighting the alarming trend of the increased heating of our planet.
These temperatures have been attributed predominantly to human activity fueled by fossil fuel emissions, and the continuous warming of the climate system has led to inevitable new temperature extremes, according to Carlo Buontempo, director of the Copernicus Climate Change Service. Despite the influence of factors like El Niño, which historically contributes to warmer global temperatures, February’s exceptional temperatures underscore the undeniable impact of human activities on the global climate.
The consequences of this warming trend are far-reaching, extending beyond rising temperatures, and encompass profound economic implications. The Swiss Re Institute warns that unchecked climate change could strip up to 18% of the global economy’s gross domestic product (GDP) by 2050 if temperatures rise by 3.2°C. Even under more optimistic scenarios aligned with the Paris Agreement targets, significant economic losses are projected, with potential GDP reductions ranging from 4% to 14%.
The economic toll of climate change is not uniform across regions, with Asian economies facing the greatest risk of GDP losses. Advanced Asian economies like China are particularly vulnerable, with potential GDP reductions of nearly 24% under severe climate scenarios. Conversely, some advanced economies in the northern hemisphere, such as the United States (US) and Switzerland, are deemed less susceptible to significant economic impacts.
The devastating effects of climate change also include systemic risks that threaten global stability. The World Economic Forum’s Global Risks Report identifies climate action failure as the world’s most impactful long-term risk, underscoring the urgent need for decisive measures to mitigate climate-related risks.
Addressing the economic challenges of climate change requires concerted efforts from both public and private sectors. The Swiss Re Institute emphasises the importance of meeting the targets outlined in the Paris Agreement and accelerating the transition to net-zero emissions to mitigate climate risks. By acting decisively to curb emissions and enhance climate resilience, stakeholders can minimise climate change’s economic fallout and safeguard future generations’ prosperity.
The economic impact of climate change underscores the need for robust policy responses and collaborative efforts to address this existential threat. As temperatures continue to rise and weather patterns become increasingly erratic, the global community must prioritise climate action to mitigate the far-reaching consequences of unchecked climate change. Failure to do so risks economic prosperity and the stability and well-being of societies worldwide.
A LOOK AT THE MARKETS
Global bond yields react to economic signals
In the realm of global finance, bond yields are often a barometer of economic sentiment, and recent movements in major economies paint a nuanced picture.
In the US, the yield on the 10-year Treasury dipped to 4.1%, its lowest level in about a month. This decline followed the US Federal Reserve (Fed) Chair, Jerome Powell, indicating a potential rate cut later this year. Powell’s remarks underscored the Central Bank’s cautious approach, emphasising the need for “greater confidence” in inflation trends amidst lingering economic uncertainties.
Across the pond, the United Kingdom (UK) witnessed a contrasting trend, with its 10-year government bond yield edging above 4%. This rise in yields from a recent low was propelled by Chancellor of the Exchequer, Jeremy Hunt’s announcement of permanent tax cuts in the spring budget. Projections from the Office for Budget Responsibility (OBR), foresee a quicker than expected decline in inflation, with forecasts anticipating accelerated economic growth and improved public finances in the coming years.
In South Africa, bond markets echoed global sentiment, with the 10-year government bond yield easing from recent highs. Despite global speculation of potential rate cuts, the South Africa Reserve Bank (SARB) remained steadfast in its commitment to tackle inflation before considering any policy adjustments.
Equity markets navigate mixed signals
Thursday’s market movements reflect a delicate balance between economic data and corporate earnings, driving varied performances across major indices.
In the US, stock futures climbed, buoyed by positive sentiment from the previous session. While initial jobless claims edged higher and labour costs were revised downwards, traders found reassurance in Fed Chair, Powell’s tempered stance on interest rates. Tech stocks, Apple and Nvidia showed resilience in premarket trading, while electric car manufacturer, Tesla faced a slight dip.
Across the Atlantic, Frankfurt’s DAX 40 Index retreated slightly amidst anticipation of the European Central Bank’s (ECB’s) interest rate decision. Designer lifestyle brand, Hugo Boss, and automotive part company, Continental, faced setbacks on disappointing forecasts, contrasting with global healthcare company, Merck’s optimism and airline, Lufthansa’s steady performance.
In the UK, the FTSE 100 Index dipped after recent gains, with the banking and mining sectors bearing the brunt. Aerospace business, Melrose, and sports betting and gaming group, Entain, faced declines due to regulatory concerns, while financial services firm Virgin Money UK surged on acquisition news. Pest control giant Rentokil Initial and short-term insurance company, Admiral Group, reported positive outcomes amid market volatility.
In Japan, profit-taking drove the Nikkei 225 and TOPIX indices lower, compounded by speculation of a potential interest rate hike by the Bank of Japan. Despite strong cash earnings data, market sentiment wavered.
In South Africa, the JSE All Share Index saw marginal declines, influenced by sectoral dynamics and global economic cues. Diversified mineral resources company, Exxaro Resources’ earnings outlook added positively to market considerations. In addition, investors continue to monitor Fed Powell’s remarks and domestic data releases for further insights.
As global markets navigate through a landscape of mixed signals, investors remain vigilant, weighing economic indicators and corporate developments to steer their strategies amidst uncertainty.
Energy markets react to supply data and rate cut expectations
In the ever-fluctuating world of energy markets, Brent Crude futures held steady at around $83/barrel following a modest 1% gain, buoyed by the latest report from the Energy Information Administration. The report revealed a smaller-than-expected increase in US crude inventories, with stockpiles rising by 1.367 million barrels, which was significantly below forecasts. The positive sentiment was further bolstered by Fed Chair, Jerome Powell’s remarks hinting at potential rate cuts later in the year. Powell’s optimism regarding global growth prospects and energy demand sent Brent prices soaring by 2.5% on Wednesday, reflecting investors’ hopes for a more accommodative US monetary policy stance. Meanwhile, Saudi Arabia’s decision to raise the prices of its main grade for Asian buyers added another layer of intrigue to the market dynamics. This unexpected move followed the expanded Organization of the Petroleum Exporting Countries, OPEC+’s agreement to extend output cuts until the end of June, signalling a concerted effort to stabilise the market amidst ongoing supply concerns.
In the precious metals arena, gold continued its upward trajectory, surpassing $2,150/ounce to reach unprecedented highs. The rally was fueled by the weakening dollar and falling US Treasury yields, as investors anticipated potential interest rate cuts from the Fed in response to mounting economic challenges. Against the backdrop of evolving central bank policies and shifting global economic dynamics, energy and precious metals markets are poised for continued volatility in the days ahead.
Economic indicators and central bank action drive currency markets
Currency markets witnessed significant movements as economic indicators and central bank actions shaped investor sentiment.
In the US, the US Dollar Index remained subdued ahead of Fed Chair, Jerome Powell’s Senate testimony, hovering near one-month lows. Powell’s recent remarks hinted at a potential easing in US monetary policy. Despite weekly jobless claims slightly surpassing forecasts and tepid private employment growth, investor focus remained on Powell’s testimony for further clarity.
Across the Atlantic, the Euro weakened as expectations grew for ECB rate cuts in June. Despite the EU Central Bank maintaining interest rates and emphasising a commitment to current borrowing costs, concerns over cooling inflation led to revised forecasts and increased anticipation of rate reductions.
Meanwhile, the British pound strengthened following Chancellor Hunt’s announcement of permanent tax cuts aimed at stimulating economic growth. Positive revisions in inflation and economic growth forecasts, coupled with promising projections for public finances, bolstered investor confidence in the pound’s performance.
In South Africa, the rand appreciated against the dollar, supported by rising gold prices and domestic GDP figures that indicated that South Africa narrowly avoided a technical recession. However, despite marginal economic growth in the fourth quarter of 2023, inflationary pressures persist, underscoring SARB’s cautious approach to interest rate adjustments.
Key Indicators:
USD/ZAR: 18.67
EUR/ZAR: 20.44
GBP/ZAR: 23.92
Brent Crude: $83.50
Gold: $2,157.93
Sources: Bloomberg, Reuters, Trading Economics, International Monetary Fund, World Economic Forum, National Bureau of Economic Research and Swiss Re Institute.
Written by: Citadel Global Director, Bianca Botes.