Yen stirs emotions, drains oil in Q3 market rollercoaster By Reuters

By Marc Jones

LONDON (Reuters) – What a wild neighborhood for markets! The yen’s strongest run since the 2008 global meltdown, central banks tilting, oil sinking, gold shining and China spraying economic stimulus.

Q3 scores show world stocks and US Treasuries up about 6%, gold up nearly 15%, yen up 11%. Oil is 17% lower and central banks just made the biggest batch of interest rate cuts since the COVID-19 pandemic.

The storms started when the normally docile yen went wild at the idea of ​​higher Japanese rates almost exactly at the same time that US economic data started to look dodgy.

In just a few weeks, MSCI’s main global stock index has lost $6 trillion in one of the fastest sell-offs in years, particularly for Big Tech. Traders have gone from pricing in one or two US rate cuts this year to five or six.

“The biggest thing that happened in Q3 was that the yen trade broke down,” said Kit Juckes of Societe Generale (OTC: ), explaining the strategy of borrowing cheaply in Japan to buy higher-yielding assets in other side.

“That, along with the weak early US data, really changed the market.”

But the prospect of lower borrowing costs did the trick. By the end of August, world stocks had recovered and Chinese markets were about to make a remarkable turnaround.

As Beijing opened up stimulus measures, including lower rates and measures aimed at the ailing housing market, Chinese stocks just posted their strongest week since 1996, with housing stocks up by a third.

China’s momentum also helped fuel the biggest quarterly rise in both emerging market equities and leading global volatility measures since 2022.

“China needs to recover to see a recovery in the asset class,” said Claus Born, an emerging markets equity portfolio manager at Franklin Templeton. “China’s influence is very important.”

A LITTLE LESS MAGNIFICENT

Markets are still showing signs of bruising from the turmoil of August.

Among the “Magnificent Seven” tech stocks that dominate global markets — Nvidia (NASDAQ: ), Microsoft (NASDAQ: ), Amazon (NASDAQ: ) and Google (NASDAQ: ) — all ended the quarter lower than they started.

Don’t panic yet, Apple (NASDAQ: ), Meta (NASDAQ: ) and Tesla (NASDAQ: ) are up 9%, 13% and 32% respectively in Q3, and Nvidia is up 145% for the year.

In commodities, the big Q3 change was a 17% drop in oil, despite the escalating conflict in the Middle East, where Israel’s bombing has now extended into Lebanon.

Tensions in the Middle East and a weaker dollar helped gold set new highs and it looks set to have its strongest quarter since 2016.

In agricultural commodities, the cocoa shortage has pushed prices up 87% for the year, which will be the second-biggest annual price increase on record barring a crunch in the fourth quarter.

Europe has not escaped volatility. French bond risk soared 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 French 5-year debt than they are from Greece, the country that was at the center of the eurozone crisis.

The euro also fell against European peers such as the British pound and the Swiss franc.

Debt specialist Gramercy said the rise in French government bond yields, which includes the Franco-German yield gap of more than 80bps, had prompted comparisons with the “Liz Truss moment” that the UK gold market endured last year two years.

I HAVE A CARD

But there is no chance of a quiet end to the year, with the fourth quarter set to be dominated by the November US election between Donald Trump and Kamala Harris.

BofA analysts point out that even under normal conditions, the CBOE, Wall Street’s “fear gauge,” typically rises about 25 percent between July and November during US election years.

The vote – which could bring trade tariffs if Trump wins – will trigger further turmoil if investors feel the outcome could influence the Fed’s rate plans.

JPMorgan economists estimated that US inflation could rise by 2.4% if Donald Trump wins and imposes a 60% tariff on all imports from China and a universal minimum tariff of 10% on those elsewhere. They also think it would push the dollar up by 4-6%.

Fidelity’s Henk-Jan Rikkerink said the wild card for markets (for Q4) is a much more complex set of geopolitical risks. “The conflicts in the Middle East and Ukraine continue, with no end in sight, and the US election looms on November 5.”

(Additional graphic by Pasit Kongkunakornkul; Editing by Jane Merriman)