Markets in Q3: Goldilocks fairytale turns into bad bear nightmare

  • World stocks lose another $9 trillion on the way to record annual decline
  • King Dollar crushed everything underneath
  • Central banks trigger third major bond bear market
  • Oil cut by recession fears, more pain predicted on Wall Street

LONDON, 30 September (Reuters) – If investors in global markets thought 2022 couldn’t be any more painful or unpredictable, the past few months have proved them wrong.

Another $9 trillion wiped out by world stocks, oil prices down more than 20%, historic losses for bonds, war and things have gotten so ugly in Japan and G7 Britain in recent weeks that the authorities have had to intervene.

As central banks race to raise lending rates on fears of inflation, there have been nearly 300 rate hikes in the last year.

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It seems those golden good times – when markets soar while economies chug at just the right temperature – are finally over.

Analysts at BofA compare it to a “cold Turkey” and blame it for causing the third “Great Bond Bear Market”.

They calculate that the more than 20% losses that Treasury investors suffered last year now correspond to 1920 and 1949, after World Wars I and II and the Great Depression of 1931.

The combined collapse of global stock and bond markets means that global market capitalization has collapsed by over $46 trillion.

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“2022 in a Nut: The inflation shock caused an interest rate shock that now threatens a recession shock and a credit event,” analysts at BofA said, explaining that peace, globalization and easy money are being preceded by an “inflationary era of war, nationalism, fiscal panic , quantitative” would be replaced by tightening, high interest rates, high taxes”.

Global markets in 2022

This quarter was marked by optimism as MSCI’s 47-country global equity index rose 10% between July and mid-August. But the Fed’s rate-hike wrecking ball soon came back into play, and that index is down 15% since then, leaving it down 25% and $18 trillion year-to-date.

Rising recessionary expectations, coupled with plans by the West to halt Russian oil purchases, have sent Brent prices down 20% after their turbocharged start to the year. Although the looming energy crisis in Europe means that natural gas prices have risen by 18% since July, it was almost 140% at the end of August.

Global government bond yields are rising

Wall Street’s bear market is now 268 days old and has posted a peak-to-trough decline of about 24%. That’s still relatively short and shallow compared to previous drops, though.

Since 1950, the average US bear market has lasted 391 days, with an average peak-to-trough decline of just over 35%, according to Yardeni Research, and banks from BofA to Goldman are warning the traditional year-end “Christmas rally” could be canceled.

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“The complacency about central banks is gone, it was, it is gone. But the complacency about the macroeconomic situation and the geopolitical situation is not,” said Olivier Marciot, head of investments for multi-assets and wealth management at Unigestion.

“You can just look anywhere, there is no glimmer of hope right now.”

World stocks have posted a record fall since the beginning of the year

KING DOLLAR

The only place to really take cover this quarter and for the year was in the dollar.

It has charged another 7%, so it is up 17% for the year against the major world currencies. Against the Japanese yen and British pound, it’s an even bigger 20% and 18%, respectively, putting these currencies on course for their biggest annual losses since 1979 and 2008, respectively.

Reuters graphics

The overall crypto market valuation has plummeted from $2.2 trillion to $940 billion by 2022, though Bitcoin hasn’t contributed much to its 60% YTD decline this quarter at least, and Ether has been boosted by a green software upgrade .

Amazingly, no significant EM currency rose this quarter. China’s yuan has fallen 7% to its lowest level since the global financial crisis, and a number of Eastern European entities have fallen another 10% as the war in Ukraine raged on.

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Ukraine itself has defaulted with Sri Lanka, and concerns are widespread in both currency and bond markets that Ghana and Pakistan are next.

JPMorgan estimates $70 billion has fled EM hard-currency bond funds year-to-date, and the MSCI Emerging Markets Equity Index (.MSCIEF) will post a fifth straight quarter of losses and experience its longest-ever bear market, Morgan Stanley says.

Sluggish growth, the aftermath of an ongoing housing crash and tough COVID policies mean China and Hong Kong (.HSI) indices fell more than 15% and 20%, respectively, in the third quarter, marking their worst quarters in seven and ten months, respectively. were eleven years.

Notably, after rallying another 30%, Turkey’s stock index (.XU100) is now up 70% for the year, despite the lira falling 10% for the quarter and almost 30% for the year amid fears it could all unravel.

“The trigger, the reason and the cause of all this was interest rates and inflation going through the roof,” said Wim-Hein Pals, Robeco’s head of emerging markets equities, of the massive decline in markets this year. “Money is no longer free”.

EM currencies are being crushed

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Additional reporting by Tom Wilson and Karin Strohecker; Adaptation by Toby Chopra

Our standards: The Thomson Reuters Trust Principles.