Pivot-Hope-Punisher Powell Leaves Q3 Global Market Bloodbath In His Wake

What a week, month, quarter, year! Q3 saw the end of the beginning of the end of the fun and games and Powell peeing in the punchbowl at Jackson Hole went full Leeroy Jenkins on global markets…

The S&P 500 Index is ending this quarter deep in the red (back below 3600), fully erasing an earlier 14% gain that occurred in July through mid-August. All the majors are back in bear market territory, but Small Caps and the Nasdaq are the ugliest horses in this glue factory… (Nasdaq is now below the June 16 lows)

As Bloomberg notes, this will mark the first time since 1938 that the benchmark is closing a quarter with a negative return after earlier rising more than 10% and posting the biggest drawdown from a quarterly high in recent decades.

The turnaround shows how much hawkish central banks and economic fears are weighing on risk assets, making any rally susceptible to a quick burnout.

The S&P 500 has lost $10 trillion in market value…

The global bond market is currently undergoing its worst drawdown ever… by along way!

Source: Bloomberg

While weakness spread across global bonds, it was the US Treasury market that led the way in September with the short-end up over 70bps in yield…

Source: Bloomberg

‘Fed Pivot’ hopes were dashed mid-quarter, sending yields surging higher and the yield curve deeper into inversion…

Source: Bloomberg

As BofA’s rates guru Marc Cabana warns:

“Thin UST liquidity & limited demand may make the US market vulnerable to a market functioning breakdown, similar to UK…. Fed could follow BoE in event of extreme UST market functioning breakdown”

Rate-hike expectations surged during the quarter, and at the same time, expectations for subsequent recession-saving rate-cuts languished…

Source: Bloomberg

And as yields rose – and rate-hike expectations soared –  stocks tumbled unable to find enough ‘bad news’ in macro to prompt more hype/hope of a pivot in September…

But the quarterly performance for stocks shows the real swing around Powell’s Jackson Hole speech…

Source: Bloomberg

This week saw all the majors trade lower (despite BoE saving the world midweek briefly) with a notable decoupling between Small Caps (outperforming) and the rest…

European stocks were just as ugly in September with UK’s FTSE suffering worst…

Source: Bloomberg

Q3 is the 3rd quarter in a row during which a ‘balanced’ stock/bond portfolio lost money (if it wasn’t for July’s gains, this would have been the worst quarter ever for a stock/bond portfolio)

Source: Bloomberg

The dollar rose for the 4th straight month (and 8th of the last 9) to its strongest since April 2002…

Source: Bloomberg

Interestingly, Russia’s Ruble was the best performing currency (along with the Mexican Peso) while the rest of the world’s fiat faded against the greenback…

Source: Bloomberg

Cryptos ended the quarter higher with Ripple and Ethereum outpeforming (bitcoin was the laggard)…

Source: Bloomberg

In commodity-land, the strong dollar weighed on everything with Bloomberg’s Spot Commodity Index down for the 3rd month of the last 4 and back at its lowest since Jan 2022…

Source: Bloomberg

Crude and Copper were down hard in September amid global growth fears and hawkish monetary policy talk. Silver managed gains on the month, significantly outpeforming gold…

Source: Bloomberg

After dropping 13% and 9% respectively in July and August, Americans pump prices for gas were unchanged in September and are now up 10 days in a row…

Source: Bloomberg

Finally, we note that US financial conditions have tightened dramatically in the last quarter as Powell punched the ‘pivot-hopers’ in the face…

“This week has told us a lot about the transitions going on,” said El-Erian, who is also president of Queens College, Cambridge and a Bloomberg Opinion columnist.

“The next few weeks are going to be pretty volatile.”

And for all those hoping for a pivot, El-Erian has a few short words: “be careful what you wish for…”

“This pivot only happens if you have an economic accident or a financial accident. And the journey to an economic accident or a financial accident is a very painful journey.”