Lingering inflation keeps Wall Street muted to end brutal quarter

Summary
Companies

World stock lose another $9 trln on way to record yearly drop
King dollar has crushed all beneath it
Central banks trigger the third great bond bear market
Oil cut by recession angst, more Wall Street pain predicted

LONDON, Sept 30 (Reuters) – If global market investors thought 2022 couldn’t get any more painful or unpredictable the last few months have certainly proved them wrong.

Another $9 trillion wiped off world stocks, oil down more than 20%, historic losses for bonds, war, and things became so ugly in G7 Japan and Britain in recent weeks that the authorities had to step in.

With inflation-fearing central banks racing each other to ramp up borrowing rates there have now been nearly 300 interest rate hikes over the last year.

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It seems those goldilocks good times – where markets rally as economies chug along at just the right temperature – are definitively over.

Analysts at BofA liken it to going “Cold Turkey” and blame it for causing the third “Great Bond Bear Market”.

They calculate the 20% plus losses suffered by government debt investors over the last year are now a par with the post World War I and II years of 1920 and 1949, and the Great Depression rout of 1931.

The combined collapse in global stock and bond markets means global market capitalisation has been slashed by over $46 trillion.

“2022 in a Nut: Inflation shock caused rates shock which now threaten recession shock and credit event,” BofA analysts said, explaining that peace, globalisation and easy money was being replaced by an “inflationary era of war, nationalism, fiscal panic, quantitative tightening, high rates, high taxes”.

This quarter did have a spell of optimism when MSCI’s 47-country world stocks index rallied 10% between July to mid August. But the Fed’s rate hike wrecking ball soon came swinging back in, and that index has plunged 15% since, leaving it down 25% and $18 trillion year to date.

Mounting recession expectations, along with the West’s plans to stop buying Russian oil, have seen Brent prices nosedive 20% after their turbo-charged start to the year. Though Europe’s looming energy crisis means its natural gas prices are up 18% since July, back in late August than stat was almost 140%.

Global government bond yields race higher

Wall Street’s bear market meanwhile is now 268 days old and notched a peak-to-trough decline of about 24%. That is still relatively short and shallow compared with past drops though.

Since 1950, the average U.S. bear market lasted 391 days with an average peak-to-trough drop of just over 35%, according to Yardeni Research and banks from BofA to Goldman are warning the traditional end-of-year ‘Santa rally’ might be cancelled.

“The complacency regarding central banks has disappeared, it’s been, it’s gone. But complacency regarding the macro situation, the geopolitical situation hasn’t,” said Olivier Marciot, head of investments for multi assets and wealth management at Unigestion.

“You can just look all over the place, there is no glimpse of hope right now.”

KING DOLLAR

The only place to really take cover this quarter and for the year has been the dollar.

It has charged up another 7% leaving it up 17% for the year against the main world currencies. Against the Japanese yen and UK pound its an even bigger 20% and 18%, putting those currencies on course for their biggest respective yearly falls since 1979 and 2008.

The overall crypto market valuation has slumped to $940 billion from $2.2 trillion through 2022 although bitcoin hasn’t added much to its 60% YTD fall this quarter at least, and ether has been boosted by an eco-friendly software upgrade.

Staggeringly, no notable EM currency has risen this quarter. China’s yuan has slumped 7% to its lowest since the global financial crisis and a number of eastern Europe units have dropped another 10% as the Ukraine war has rumbled on.

Ukraine itself has joined Sri Lanka in default and concerns are rife in both currency and bond markets that Ghana and Pakistan are next.

Year-to-date $70 billion has fled EM hard currency bond funds, JPMorgan estimates, and MSCI’s emerging markets equity index (.MSCIEF) will see its a fifth straight quarter of losses and set its longest ever bear market, Morgan Stanley says.

Spluttering growth, the fallout from a prolonged property crash and a strict COVID policy mean Chinese and Hong Kong’s (.HSI) indexes are down more than 15% and 20% for Q3 in what is their worst quarters in seven and eleven years respectively.

Remarkably Turkey’s stock index (.XU100) is now up 70% for year after a further 30% rally although with the lira down 10% for the quarter and nearly 30% for the year there are fears that it could all unravel.

“The trigger, the reason and the cause of all this has been interest rates and inflation going through the roof,” Robeco’s head of emerging market equities Wim-Hein Pals said of the mass fall in markets this year. “Money is not free anymore”.