What a wild quarter for the markets! The yen experienced its biggest rise since the global crash of 2008, central banks pivoted at full speed, oil plunged, gold shone and China sputtered with economic stimulus measures.
Third quarter results show that global stocks and US Treasuries both rose about 6%, gold almost 15% and the yen 11%. Oil is down 17% and central banks just made the biggest round of interest rate cuts since the COVID-19 pandemic.
The storms began when the normally docile yen got excited about a Japanese rate hike, almost at the same time that U.S. economic data began to look ominous.
In the space of a few weeks, the main global stock index MSCI lost $6 trillion in one of the fastest sell-offs in years, particularly for big tech companies. Traders have gone from one or two U.S. rate cuts this year to five or six.
Societe Generale’s Kit Juckes said: “The most important thing that happened in the third quarter was the collapse of the yen carry trade,” explaining the strategy of borrowing cheaply from Japan to buy higher yielding assets elsewhere.
“This phenomenon, as well as the first discouraging American statistics, have really changed the market.
The prospect of a drop in borrowing costs, however, got the better of the situation. By the end of August, global stocks had rebounded and Chinese markets were poised for a remarkable rally.
While Beijing has opened the taps of stimulus, including lowering interest rates and taking measures targeting the ailing real estate market, Chinese stocks have just had their strongest week since 1996 and shares in the real estate sector jumped by a third.
China’s largesse also helped spur the biggest quarterly rise in emerging market stocks and key indicators of global volatility since 2022.
“China has to recover for the asset class to recover,” said Claus Born, emerging markets equity portfolio manager at Franklin Templeton. “China’s influence is very significant.
A LITTLE LESS MAGNIFICENT
The markets are still showing signs of being bruised following the turbulence of August.
Among the “Magnificent Seven,” the tech stocks that dominate global markets – Nvidia, Microsoft, Amazon and Google – all finished the quarter lower than when they started.
Don’t panic though: Apple, Meta and Tesla grew by 9%, 13% and 32% respectively in the third quarter and Nvidia was up a staggering 145% for the year as a whole.
As for commodities, the big change in the third quarter was the 17% drop in oil, despite the escalating conflict in the Middle East, where Israel’s bombing spread to Lebanon.
Tensions in the Middle East and a weakening dollar have sent gold to new record highs and it appears to have had its best quarter since 2016.
In agricultural commodities, cocoa shortages have pushed prices up 87% over the year, which will be the second biggest annual rise on record, barring a collapse in the fourth quarter.
Europe has not escaped volatility. Risk on French bonds has risen to its highest level since the eurozone crisis, after far-right gains caused major headaches for French President Emmanuel Macron.
As a result, investors are now demanding a higher interest rate to buy 5-year French debt than for Greece, the country that was at the center of the Eurozone crisis.
The euro has also fallen against its European peers, such as the pound sterling and the Swiss franc.
The Gramercy fund, which specializes in bad debts, said the rise in French government bond yields, which also includes the French-German yield differential surpassing 80 basis points, had prompted comparisons with the “Liz moment Truss” that the British gilt market suffered two years ago.
CARTE TRUMP
But there is no chance of a quiet end to the year, with the fourth quarter expected to be dominated by the US election in November between Donald Trump and Kamala Harris.
BofA analysts point out that even under normal conditions, the CBOE VIX index, Wall Street’s “fear gauge”, typically rises about 25% between July and November in US election years.
The vote, which could result in tariffs if Mr. Trump wins, will cause even more turbulence if investors believe the outcome could influence the Fed’s interest rate plans.
JPMorgan economists estimate that US inflation could jump 2.4% if Donald Trump wins and imposes 60% tariffs on all imports from China and universal minimum tariffs of 10% on those. from other countries. They also think it would push the dollar up 4% to 6%.
Fidelity’s Henk-Jan Rikkerink said the wild card for markets (for the fourth quarter) is a much more complex set of geopolitical risks. “Conflicts in the Middle East and Ukraine continue, with no end in sight, and the US elections loom on November 5.
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