CO2: The True Challenge
Topic of the week
The largest contributor to the generation of carbon dioxide (CO2) in the world today is the production of electricity and heat. When we think about percentage shares in global CO2 emissions, controversial sectors such as aviation and agriculture do not come close to the total percentage of our current problem.
Source: Climate Watch (2023); Population based on various sources (2023)
From this perspective, it is evident that governments should be very focused on promoting and restructuring the way their energy matrices are developed. Without generating statistics on what each country, at least the largest ones, does wrong, it is possible that the key is to analyze what countries with low emissions do correctly. From the point of view of low-cost energy generation with low CO2 emissions, we have countries like Brazil, which invested decades ago in hydroelectric systems (transforming water power into energy) and promoted a major change in the way it is generated. For example, the largest hydroelectric plant in Brazil is ITAIPU, a project that emerged in 1975 in conjunction with Paraguay. Its optimal performance maintains a high index of clean and renewable energy generation, which avoids consuming 550,000 barrels of oil and prevents the emission of 87 million tons of carbon dioxide daily.
On the other hand, we also have nuclear energy as a clean energy source. Currently, the issue is not well-regarded by society and governments, due to what happened in Japan with the disaster caused after the Tsunami. Additionally, there are large and heated discussions about whether nuclear energy can be considered clean or not. It is important to note that between 2022 and 2024 the Eurozone understood that nuclear energy would be a clean source. This caused several member countries to rethink making significant investments in this area. This movement increased after the Russia-Ukraine war as it made Europe realize that with Russian energy sources trapped, distribution in member countries was affected. From a geopolitical perspective, it was an important lesson for the countries, who realized that it is dangerous to depend on other nations for a minimum supply.
In summary, each energy source has its strengths and weaknesses. Hydroelectric power, after its implementation, becomes a cheap and durable source, but it needs a lot of space to store water and a large initial investment, while nuclear power can consume less land and can be done in a more decentralized way and generally with little maintenance. It is possible to build sufficiently safe plants and produce energy to supply an entire country. France is a great example by generating around 70% of its energy through its nuclear plants. It is essential to point out that central governments, especially those that contribute the most to CO2 emissions, have to look for large projects to carry out the emission of clean energy in the coming centuries. The problem is that projects like these take between 10 and 20 years to be completed, however, we have to think long term. Now it is up to governments to plan and pursue the change in the energy generation matrix and, ultimately, effectively reduce CO2 emissions.
Spotlight on Markets:
The next few days could be relatively quiet in the financial markets until Thursday, when the US GDP estimate for the first quarter of 2024 (+1.3% estimated) will be released, and on Friday, when we will know the PCE (personal consumption expenditure) data, which remember is the FED’s favorite data to make its estimates on the future evolution of inflation.
The closing on Friday in the S&P 500 showed a minimum rise in the last seven days leaving the accumulated return in 2024 at +11.21%. For its part, the Nasdaq 100 did rise by +1.4% to leave its annual revaluation at +11.78%, in this case being favored by the good results of Nvidia and the good forecasts that it transferred to the market for the entire industry of Artificial Intelligence. In Europe, the result of the stock markets was negative as the possible delay of the first rate cut by the FED weighed much more, while economic activity, although it seems to be going from less to more, is still at very low levels of growth. Thus, the Euro Stoxx fell -0.23% compared to -0.72% of the Ibex 35, although they also reflect returns in 2024 above 11%.
Fixed income markets ended the week with slight rebounds in government bond yields, between 0 and +6 bps. The 10-year US Treasury closed at +4.46%, the German Bund at +2.58% and the Spanish Bond at +3.38%. The cause of this rebound lies in the conclusions that the market drew from the publication of the Minutes of the FED, which reflected doubts among some of its members on whether the current level of interest rates is restrictive enough to definitively control the high level of price growth reflected in inflation. However, the most repeated message by the members of the FED is that we will have high interest rates for longer than initially anticipated, but they remain very expectant on the evolution of the macroeconomic data to act accordingly.
As for commodities and precious metals, we experienced a week of some consolidation. Copper (and other metals) gave way from the highs, but with pressure regarding possible future demand, which could lead to new highs at any moment. For its part, gold fell -3.43% in the week after reaching a new historical high on Monday, May 20, at $2,454/oz, closing at $2,334 on Friday. Regarding crude oil, Brent ended at $82.12/bbl, which meant a drop of -2.21%. In this case, the explanation lies in the downward revisions that are being made to gasoline demand in the US for the summer season, along with mediocre economic activity in Europe and a Chinese economy that has not yet fully recovered.
We have not mentioned anything about the geopolitical tensions (Ukraine-Russia, Israel-Palestine-Iran, China-US) as the feeling is that the market is immune to them and the consequences of a possible escalation would already be reflected in current prices. But it is necessary to remember that the stock markets are at levels very close to historic highs, with very low volatility levels, and therefore, any unforeseen event could trigger sell orders of a certain magnitude.
The Quote:
We close with the following quote by Ludwig Wilhelm Erhard, a German politician and economist and Federal Chancellor of West Germany between 1963 and 1966: «An economic policy can only be called ‘social’ if it makes economic progress, high performance, and increasing productivity benefit the consumer.»
Summary of the performance of Main Financial Asset classes (27/05/2024)
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