Global stocks weather third-quarter AI, bond and crude maelstrom

Global stock markets have shown resilience despite a tumultuous third quarter driven by rising global borrowing costs, currency interventions, soaring oil prices, and growing concerns over artificial intelligence's potential impact. Despite these challenges, the most widely tracked world equity indexes are just 2% below their all-time highs and have risen more than 12% for the year. G10 government bonds, typically considered a safety net for investors, have been the primary cause for concern, especially in September.

In the US Treasury market, which serves as the benchmark for global financial assets, the 10-year yield has surged past 5%, reaching its highest level since before the 2007 financial crisis. Similar trends are observed in Japan, Germany, France, and Britain, where yields have hit multi-decade highs. This trend has led to the largest decline in investors' returns in years, as falling bond prices are the inverse of rising yields.

AXA's Chief Economist, Gilles Moec, highlighted that the current yield trend marks a clear upward shift, causing significant nervousness among investors. South Korea's KOSPI index, heavily influenced by AI-related chipmakers, saw a decline of nearly 20%, marking its worst quarterly performance since the COVID-19 pandemic. However, Pictet Asset Management's Arun Sai noted that global stocks are benefiting from unprecedented earnings growth, with S&P 500 earnings expected to increase by at least 30% this year.

Currency markets experienced a rare coordinated intervention by Japan and the US in late July to prevent the yen from sliding to near 40-year lows. The dollar has fallen by 3% against the Japanese currency this quarter and recovered against the Swiss franc, euro, and Mexican peso. Bitcoin has also surged, while oil prices have jumped 40% quarterly, leaving it up 70% for the year.

Though Turkish markets faced turmoil from a Ponzi-like funds scheme, large, developing economies have largely survived the bond market selloff. Viktor Szabo, an EM portfolio manager at Aberdeen, stated that significant market turmoil has been avoided so far. However, investors remain cautious about future developments, particularly the level of bond yields and the impact of AI-driven equities on the market.

Looking ahead, conflicts in the Middle East and Ukraine, rising interest rates, and upcoming elections in Brazil and the US, including Donald Trump's potential run for the presidency, could pose additional challenges for the global economy. While the immediate outlook appears stable, Kathryn Exum, Co-Head of Sovereign Research & Strategy at Gramercy, emphasized that sustained high yield levels above current rates would be a major concern for investors.