March Market Commentary

Commentary by Carbon Cap Management LLP  – A Thornbridge Appointed Representative

In March, major equity indices posted gains:

• MSCI World Index up 3.1% (+7.7% year-to-date)

• S&P 500 up 3.5% (+7.0% YTD).

Commodity markets had a mixed month

• Bloomberg Commodity Index down -0.6% (-6.5% YTD),

• Gold up 7.8% (+8.0% YTD)

• Brent Oil down -4.9% (-7.15% YTD).

US

Compliance carbon markets experienced another month of high intra-month volatility and mixed price action with 3 markets down and 2 markets up. In the US, both of the regional carbon markets posted positive returns in March.

The California market was up +3.7% (+2.4% YTD) as investors continued to return to a bullish view based on the long-term fundamentals and confidence grew after it became clear that wider market contagion from the banking failures would be contained.

Similarly, the RGGI market posted a monthly gain of +2.1% (-5.8% YTD) on bullish fundamentals and a strengthening of conviction around additional policy reforms to be announced later in 2023 along with news about the integration of the market with the newly proposed NY State carbon market.

Europe

In Europe, the EUA market was down -7.9% and the UKA market also declined -12.7%.

The EUA market experienced high volatility ahead of the quarterly options expiry in March. Significant options open interest in multiple strikes around the €90.00 level created increased volatility from gamma hedging and prices migrated towards the €90.00 level at expiry. In addition, the uncertainty around the quantity and timing of the Re-Power EUA sales created additional volatility in the market.

In the UKA market, the price decline resulted from bearish power sector fundamentals which saw the UK import a record of electricity from Europe due to the monthly amount increased French nuclear power generation and a recently opened third interconnector to France. This imported power largely replaces domestic gas-fired generation.

NZ

In New Zealand, carbon prices fell -18.7% in March (-28.7% YTD) as the first quarterly auction of 2023 failed to clear due to an insufficient quantity of qualifying bids above the confidential auction reserve price. This unsold auction volume now rolls over to the June auction and if unsold, will roll again to the next auction. If all four 2023 auctions fail to clear, then any unsold volumes will be cancelled, impacting long-run supply-demand dynamics.

Author: Alex Hackett

Alex is a member of the investment funds team. She is involved in the portfolio construction process, regulatory reporting, trade surveillance and monitoring.