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

Stock market investors might have been expected to run for the hills in the face of an extraordinary surge in global borrowing costs, currency interventions, wars, oil back above $100 a barrel and warnings that AI might wipe out humanity.

Yet the most widely ​tracked world equity indexes are just 2% off their all-time highs and up more than 12% for the year after another $3 trillion tick higher during a tumultuous third quarter.

Instead it has been G10 ‌government bonds, ultra-safe assets supposed to provide the ballast ‌in global investment portfolios, which have been causing all the worries, especially this month.

In the $29-trillion US Treasury market, which anchors pricing for virtually all financial assets, the key 10-year yield has soared past 5% to its highest level since just before the 2007 financial crash.

Yields in Japan have climbed to multi-decade highs too, ​while those in Germany, France and Britain have all hit 17 to 19 year peaks. As bond prices move inversely to yield it has meant the biggest hit to investors returns in years.

AXA’s chief economist Gilles Moec said that unlike when Treasury yields spiked above 5% in the 1990s and before the financial crisis, this rise was part of a new clearly upward trend.

“What people are worried about is ​that we are in a completely different structural trend now, that is the long and the short of it,” said Moec.

“It is making people very, very nervous,” he added.

There have been some snags for stock market bulls.

South Korea’s KOPSI index, ​whose chipmakers have been a big driver of AI euphoria, has pulled back almost 20%. It makes it its worst quarter since the COVID-19 pandemic, ​although it is still twice a valuable as it was this time last year.

Pictet Asset Management’s Arun Sai said world stocks were riding a “truly unprecedented” earnings rise. S&P 500 earnings for example are expected to jump at least 30% this year.

“It dwarfs the commodity super cycle, it dwarfs the dotcom boom, everything,” said Sai, adding: “We have never seen anything like this outside of a recession recovery”.