Even those investors speculating on dollar strength have found trades upended by the yen’s 2.3 percent rally in the third quarter and a revitalized euro.
“This is going to go down as one of the worst quarters in a while,” said Michael Antonelli, an institutional equity sales trader at Robert W. Baird & Co. in Milwaukee. “It all kicked off from a China slowdown concern and has unraveled piece by piece.”
In the U.S., the Standard & Poor’s 500 Index has dropped 7.8 percent since the end of June as companies reported a 1.7 percent slump in second-quarter earnings and cuts to analyst profit estimates outnumbered increases for 17 straight weeks.
Commodity producers are to blame for a big portion of those reductions after Brent crude oil fell below $50 a barrel on the highest OPEC output in seven years. Copper touched a six-year low, while platinum fell 15 percent in the quarter. The precious metal, used in devices that curb harmful emissions from cars, bore the brunt of Volkswagen AG’s attempts to rig pollution tests for U.S. diesel engines.Glencore Plc, the commodities group that’s become a proxy for the industry’s woes, plummeted 69 percent year-to-date on the London Stock Exchange.
Credit markets haven’t been excluded from the losses. The BofA Merrill Lynch Global Corporate & High Yield Index is set for its first annual decline since 2008, with yields approaching the highest since 2012. Government bonds returned just 1.4 percent in an environment of strong demand for haven assets.
Fed Dilemma
For all the turbulence, the U.S. economy is still “pretty solid” and the Fed should raise interest rates, Howard Marks, the co-chairman of Oaktree Capital Group LLC, said at a conference in Toronto on Tuesday. A rate increase of 25 basis points, or a quarter of a percentage point, won’t be “that big of an event” after the Fed held borrowing costs near zero on Sept. 17, said Marks, whose firm is the world’s biggest manager of distressed debt.
The “phantom rate hike” this month has only added to market volatility, according to Tony Crescenzi at Pacific Investment Management Co.
Traders in the futures market have been pushing back forecasts for Fed liftoff. They’re pricing in a 41 percent probability the Fed will raise its benchmark rate by a quarter percentage point by the Dec. 15-16 meeting, down from 60 percent at the end of August. The European Central Bank and the Bank of Japan haven’t ruled out extending their stimulus programs, while forecasters including HSBC Holdings Plc predict China will cut banks’ reserve ratios to bolster economic growth.
“More and more people will expect the Fed to postpone tightening this year if these very fearful conditions continue,” said Kei Katayama, a money manager in Tokyo at Daiwa SB Investments, which oversees $48.5 billion.