Yen Thrills and Oil Spills in Q3 Market Rollercoaster – Reuters

By Marc Jones

LONDON – What a tumultuous quarter it has been for the markets! The yen experienced its strongest surge since the 2008 global financial crisis, central banks made swift adjustments, oil prices fell, gold rallied, and China implemented significant economic stimulus measures.

In the third quarter, global stocks and U.S. Treasuries both saw increases of approximately 6%, gold rose nearly 15%, and the yen appreciated by an impressive 11%. Conversely, oil prices dropped by 17%, while central banks executed the largest cluster of interest rate cuts since the onset of the COVID-19 pandemic.

The turbulence began when the usually stable yen became volatile at the prospect of higher interest rates in Japan, coinciding with faltering U.S. economic data. In just a few weeks, MSCI’s primary world equity index lost $6 trillion in one of the swiftest sell-offs seen in years, mainly impacting major technology firms. Traders quickly shifted their outlook from anticipating one or two U.S. rate cuts this year to predicting five or six.

"The yen carry trade broke down, which was a significant event in Q3," explained Kit Juckes from Societe Generale, highlighting the strategy of borrowing at low rates in Japan to invest in higher-yield assets abroad. "This, combined with the first signs of weak U.S. data, really altered market dynamics."

The idea of lower borrowing costs provided a much-needed boost. By the end of August, global stocks had bounced back, and Chinese markets were on the verge of a significant resurgence. As the Chinese government rolled out stimulus measures, including rate cuts and support for the struggling property market, Chinese stocks recorded their strongest weekly performance since 1996, with real estate shares jumping by a third.

China’s extensive stimulus efforts also contributed to a substantial quarterly increase in both emerging market stocks and key global volatility indicators since 2022. "China’s recovery is crucial for a turnaround in the asset class," noted Claus Born, an emerging markets equity portfolio manager at Franklin Templeton. "China’s role is vital."

A BIT LESS MAGNIFICENT

Despite these developments, markets are still feeling the effects of the volatility that hit in August. Among the "Magnificent Seven" tech stocks that dominate the market—Nvidia, Microsoft, Amazon, and Google—all finished the quarter lower than at the start. However, Apple, Meta, and Tesla saw gains of 9%, 13%, and 32%, respectively, in Q3, with Nvidia boasting an extraordinary 145% increase for the year.

In the commodities sector, a notable shift occurred with oil prices sliding 17%, despite escalating tensions in the Middle East, where Israel’s military actions have extended to Lebanon. These regional conflicts and a weakening dollar contributed to gold reaching new record highs, marking its strongest quarter since 2016.

In agricultural commodities, cocoa shortages propelled prices upwards by 87% for the year, potentially leading to its second-largest annual price increase on record, barring any significant downturn in the fourth quarter.

Europe has not been immune to the market’s volatility. The risk associated with French bonds surged to its highest level since the eurozone crisis due to political gains by the far right, creating challenges for President Emmanuel Macron. As a result, investors now demand higher interest rates for 5-year French debt than for Greek bonds, which were at the heart of the eurozone crisis.

The euro has also weakened against other European currencies, such as the British pound and the Swiss franc. With the rise in French government bond yields contributing to the widening Franco-German yield spread, comparisons have emerged to the “Liz Truss moment” when the UK gilt market faced turmoil two years ago.

TRUMP CARD

Looking ahead, the final quarter of the year is unlikely to be calm, with the upcoming U.S. election between Donald Trump and Kamala Harris set to dominate. Analysts from Bank of America point out that historical trends show the CBOE’s "fear gauge" typically rises about 25% between July and November during U.S. election years.

The election outcome, which could result in new trade tariffs if Trump secures victory, may bring additional volatility if investors believe it could affect the Federal Reserve’s rate strategies.

Economists at JPMorgan have estimated that U.S. inflation could surge by 2.4% if Trump implements a significant tariff on Chinese imports and a universal minimum tariff on goods from other countries. They also project a potential 4-6% appreciation of the dollar.

Fidelity’s Henk-Jan Rikkerink highlighted that the key wild card for the markets in Q4 is the intricate geopolitical risks at play. "The ongoing conflicts in the Middle East and Ukraine are far from resolved, and the U.S. election looms on November 5th."