Markets in Q3: The calm after the storm

After the storms earlier in the year, investors have basked in a steamy summer market melt-up that has added another $5 trillion to record-high share markets and lifted almost everything else, too.

Those looking after public finances in Paris or London may disagree, but it is as if all the fiscal and trade worries have eased and investors are back to doing what they do best - buying expensive tech stocks.

Google’s have leapt almost 40% during a quarter when AI darling Nvidia also became the world’s first $4 trillion company, and China’s nearest equivalent, Cambricon, surged 120%.

The headscratcher, though, is that the usual go-to asset when traders suspect trouble, gold, has jumped another 15% to fresh record highs too and silver almost 30%.

Japan’s yen, another safety play, has dropped but the ominous rumblings in the bond markets certainly haven’t gone away either with the collapse of another French government briefly pushed its borrowing costs above Italy’s for the first time and 30-year yields hitting a record high in Japan.

At the same time, implied U.S. bond volatility has dropped to its lowest in over three years. That’s a sign that markets may be learning to live with the trade war while Moritz Kraemer, chief economist at LBBW and the former head of sovereign ratings at S&P Global, also points to the stock market’s surge.

Not only is price-to-earnings ratio on U.S. stocks now in the top 2-3% in history, just 10 firms also now account for 40% of the S&P 500’s value.

“When you then throw in all the uncertainty around Trumponomics, that’s hard to square,” Kraemer said.

A steadier dollar has also lowered stress levels. While still down nearly 10% for the year - the most at this stage of a year since 1989 - it is up 1% in the third quarter, largely thanks to a weaker yen.

Oil prices are pretty much where they started Q3, whereas gold’s record run leaves it up 45% and heading for its biggest annual jump since 1979. Silver is over 60% higher.

“Gold and silver have been the big trade,” said Saxo Bank’s head of FX strategy John Hardy, explaining the gains have been driven by worries huge government debt loads will lead to “some form of financial repression”.

There has also been the ongoing rise in European weapons makers, up almost 85% this year and leaving everything bar Chinese tech stocks and, wait for it, European banks, for dust.

That has been driven by U.S. President Donald Trump, too, following signals he will scale back Europe’s military protection forcing the region - and other NATO members - to rearm.

Another small U.S. interest rate cut and Trump’s attacks on the Fed meanwhile have shifted bond markets.

The 30-year Treasury yield surged past 5.1% to its highest since 2007 in May, but is now back at 4.7%, while Switzerland has taken its rates back down to 0%.

The dollar’s stabilisation leaves the euro up 13% for the year, the yen over 6% higher and the Swiss franc up 13.5%, while some of the fastest-charging emerging market currencies had been checked.