By Marc Jones

Market Overview

London (Reuters) – What a wild quarter for the markets! The yen’s strongest run since the 2008 global crash, central banks swivelling at speed, oil diving, gold shining and China spraying economic stimulus.

Q3 Performance

The Q3 scores show world stocks and U.S. Treasuries both up around 6%, gold almost 15% higher, and the yen up a whopping 11%. Oil is 17% lower, and central banks have just delivered 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 at almost exactly the same time U.S. economic data started looking queasy.

In just a few weeks, MSCI’s main world equity index shed $6 trillion in one of the fastest sell-offs in years, especially for Big Tech. Traders went from pricing one or two U.S. rate cuts this year to five or six.

Market Breakdown

“The biggest thing that happened in Q3 was that the yen carry trade broke down,” Societe Generale (OTC:SCGLY)’s Kit Juckes said, explaining the strategy of borrowing cheaply in Japan to buy higher-yielding assets elsewhere. “That, along with the first pieces of weak U.S. data, really changed the market.”

The prospect of lower borrowing costs did the trick though. By the end of August, world stocks had rebounded, and Chinese markets were about to make a remarkable turnaround of their own.

China’s Economic Stimulus

As Beijing turned on the stimulus taps, including lower rates and measures aimed at the ailing property market, Chinese stocks notched up their strongest week since 1996, and real estate shares rocketed by a third. China’s largesse has also helped spur the biggest quarterly spike in both emerging market stocks and the main global volatility gauges since 2022.

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

Tech Market Trends

Markets are still showing signs of bruising from the August turmoil. Among the “Magnificent Seven” tech stocks that dominate world markets, Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOGL) are all ending the quarter lower than where they were at the start. However, Apple (NASDAQ:AAPL), Meta (NASDAQ:META), and Tesla (NASDAQ:TSLA) are up 9%, 13%, and 32% respectively in Q3, with Nvidia up a staggering 145% for the year.

Commodities Overview

In commodities, the big Q3 shift has been the 17% slide in oil, despite escalating conflict in the Middle East, particularly in Israel and Lebanon. The Middle East tensions and the weaker dollar have helped gold set new record highs and have had its strongest quarter since 2016. In agricultural commodities, cocoa shortages have pushed prices up 87% for the year, which will mark its second biggest annual price jump on record barring a Q4 meltdown.

European Market Conditions

Europe has not escaped the volatility. French bond risk has exploded to its highest level since the euro zone crisis after gains by the far right have caused major headaches for French President Emmanuel Macron. Investors are now demanding a higher interest rate to buy 5-year French debt than they do from Greece.

The euro has also fallen against European peers like Britain’s pound and the Swiss franc. Distressed debt specialist fund Gramercy noted that the rise in French government bond yields prompted comparisons to the “Liz Truss moment” that the UK gilt market endured two years ago.

Looking Ahead

But there’s no chance of a quiet end to the year, with the fourth quarter set to be dominated by November’s U.S. election between Donald Trump and Kamala Harris. Analysts at BofA highlighted that even in normal conditions, the CBOE’s VIX index, the Wall Street “fear gauge,” typically rises around 25% between July and November in U.S. election years.

The election could bring trade tariffs if Trump wins, triggering even more turbulence if investors sense the outcome might influence the Fed’s rate plans. JPMorgan’s economists estimated U.S. inflation could jump 2.4% if Trump wins and imposes tariffs on imports from China and elsewhere.

Fidelity’s Henk-Jan Rikkerink noted that the wild card for the markets in Q4 is a more complex set of geopolitical risks, with ongoing conflicts in the Middle East and Ukraine and the impending U.S. election on November 5th.

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