Quarterly Investment Review – Q3 2024
Markets rose during the third quarter as most Central Banks started to ease policy by cutting interest rates, causing the yield on the US 10-year bond to fall from 4.40% to 3.78%. Stock markets moved up in tandem with the rate cuts, but this masked significant gyrations in early August. The combination of falling US interest rates and rising Japanese rates caused the yen to rise dramatically, and the Japanese market crashed 22% in three days. The VIX index, which measures volatility, reached its third highest ever reading. Most of these moves occurred within a few hours on the 5th and 6th August in thin trading, and the recovery was equally abrupt. By the end of the month the Japanese index had recovered everything when measured in dollars. However, the size of the moves indicates the potential vulnerability of markets even with relatively minor disruptions.
The rise in Japanese interest rates marks the end of the last source of free money in global markets. Since 2008 global Central Banks have kept interest rates close to zero and provided plentiful liquidity. The inflationary burst in 2022/23 brought this to an end and led most banks to raise interest rates and rein in liquidity, except in Japan. Japan was more reluctant to normalise its policy because it has spent the last thirty years escaping from a debt and deflationary bust caused by one of the largest property and stock market bubbles in history that peaked in 1989. It cut interest rates to zero in 1997, and from 2013 adopted an aggressive printing policy. As a result, Japanese money was pressured into seeking returns elsewhere, and Japanese liquidity has flooded world markets. These flows have supported asset prices but may start to retreat. Meanwhile the summer saw other developments. There were increasing signs that the US economy was less strong than previously thought with a record revision of US jobs numbers, and China’s economy has continued to disappoint. There were also signs that the dominance of the massive technology companies may be starting to wane. These three areas have been the major supports to the bull market in the last decade, so if they are deteriorating it will have significant implications for investors.
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