Written by Chris Ayton.

After a strong start to the year, equity markets took a pause for breath last week with the MSCI AC World Index down -2.1% in Sterling terms and the FTSE All Share Index down -1.4%.  The picture was similar globally as MSCI Europe ex-UK was down -2.4%, S&P 500 Index down -2.2%, MSCI Japan down -1.4% and MSCI Emerging Markets down -2.3% on the week. Fixed income securities held up a little better but the Barclays Global Aggregate Index GBP Hedged was still down -0.2%.

Investors responded negatively to the release of the minutes from the latest Federal Reserve meeting which showed a clear consensus across the Committee members to raise interest rates last month and to keep fighting inflation with further hikes as required.  The minutes also noted that some members voted for higher increases than the 0.25% rise that was finally agreed.  Economic data released post this meeting has done little to suggest the previous rate rises are beginning to bite sufficiently in order to bring US inflation or the US economy under control.  This backdrop held back equity markets globally.

Away from equity and fixed income markets, we noted with interest that the price of the EU’s Carbon Allowances (EUAs) climbed above €100 a tonne for the first time, representing a 20% rise since the start of the year.  This is the price that European companies within designated polluting industries, such as gas, coal power generation and industrial manufacturing, have to pay to buy credits to allow them to create the carbon emissions that are a by-product of their businesses. One allowance allows the purchaser to emit 1 tonne of carbon dioxide or equivalent. The higher these prices are, the higher their operating costs become and the greater the financial incentive for them to invest in more environmentally friendly solutions.  More and more industries are being brought into this regime by the EU, forcing companies to buy EUAs on the open market if they want to operate legally. In addition, the supply of these credits is designed to structurally fall over time which forces polluters to compete for an ever-reducing amount of credits, or switch to cleaner solutions.  Moving through the threshold price of €100 a tonne may turn out to be a watershed moment on the long-term path to achieving the EU’s ambitious environmental goals.  Our Multi-Asset Blend Funds have held a small exposure to these EUAs since June 2022 and  are therefore benefitting from the price rise as well as the indirect positive environmental impact of taking these credits out of the market.

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