By Marc Jones and Julien Ponthus

LONDON (Reuters) – Some of the heaviest falls ever seen in China’s markets, huge energy price rises and the clearest signs yet that central banks are starting to turn off the money taps have all hit world markets over the last quarter.

A regulatory crackdown in China has wiped a trillion dollars off its markets and sent giants such as Alibaba (NYSE:) tumbling 30% in their worst quarter on record, while property firm Evergrande, one of the world’s biggest high-yield debt issuers, is on the brink of default.

The world’s stocks are now heading for their first quarter losses since COVID-19 took its toll in the early part of last year. Bonds have also had a rough September due to taper talk and the safe-haven dollars is aiming for its best year ever since 2015.

The rising cost of shipping and commodities is causing inflation to accelerate. The price of coffee has risen nearly 60% and 120% since July, while it is also up 25% and 25% respectively for the first quarter and 40% more in freight.

Emmanuel Cau, head of European equities at Barclays (LON:), reckons markets are pricing the end of the ‘Goldilocks’ scenario – when growth and inflation are neither too high nor too low – so investors should be aware of the bears.

Cau stated that Q3 was a preview of the future with central banks shifting policies. He also noted a “brutal system change” in which investors shift from tech sectors to so-called “value shares”.

It is important to remember that Chinese growth will slow down in the future.

For a graphic on Global markets in 2021 and Q3:

https://fingfx.thomsonreuters.com/gfx/mkt/klvykgrolvg/Pasted%20image%201633008776406.png

CHINA SMASHED

The biggest drama was in Chinese markets where a crackdown on tech, digital and for-profit education firms deepened, followed by the Evergrande meltdown.

All of this led to a nearly trillion-dollar drop in Chinese equity, a 71% slump in Evergrande shares, and 14% abuse for those who invested in Chinese high-yield corporate debt.

China worries caused MSCI’s emerging stock index to drop almost 10% after five quarters with gains, and it has underperformed Wall Street by an astonishing 30 percent.

William Mileham from Mirabaud in Switzerland said, “This was one the most damaging periods for Chinese equity markets history.” He added that it felt like regulatory pressures would not cease.

For a graphic on China’s stocks slammed by clampdowns:

https://fingfx.thomsonreuters.com/gfx/mkt/zdpxodeonvx/Pasted%20image%201632960485686.png

The rising dollar also complicated life for other emerging markets, with the Chilean, Brazilian and Peruvian currencies down 7% to 9% over the quarter.

China was the worst-performing country in 2016 after its surprise interest rate cuts.

For a graphic on China’s high market market pounded by Evergrande default worries:

https://fingfx.thomsonreuters.com/gfx/mkt/egpbkygnxvq/Pasted%20image%201632957495462.png

STOCKS SPLICED

World stock markets are ending the quarter in disorderly fashion, with MSCI’s global index down around 1%, its first quarterly first loss since early 2020.

Pandemic plays Zoom and Peloton (NASDAQ:) have lost about a third of their value, but vaccine makers Moderna (NASDAQ:) and Pfizer (NYSE:) are up 60% and 11% respectively, and aeroplane engine maker Rolls Royce (LON:) has soared over 40%.

Investors will probably remember September as the end to a financial fairytale where fiscal and monetary stimulation, coupled with buoyant and moderate inflation, kept stock prices at record highs.

The rising yields of equity stocks have led to an abrupt rotation. Managers often traded growth stock for shares that were cheaper in the oil and gas and banking industries.

As sell-side analysts encouraged clients to seek “value” in order to reduce the risk of FAANGS, however, Nasdaq fell 2% during the September quarter. Amazon (NASDAQ) is losing ground.

Roland Kaloyan (OTC:), who is responsible for Societe Generale’s European equity strategy, said that it was a difficult time to create a portfolio.

You want exposure to increasing yields while also protecting your portfolio from slowing Chinese growth.

For a graphic on MSCI Value vs Growth and Bund yields:

https://fingfx.thomsonreuters.com/gfx/mkt/egpbkygqwvq/MSCI%20Value%20and%20Bund%20yields.PNG

BONDS – NO TIME TO BUY

Bond markets, after a huge July rally, tumbled in September after hawkish turns from the U.S. Federal Reserve and the Bank of England, giving global government bond buyers a rare loss of 1%.

Inflation-linked bonds from the UK and Europe were clear winners in third quarter, reporting ICE indexes. They returned around 3%, respectively, according to NYSE: BofA. These securities are benefiting from fears that inflation spurred by supply-chain disruptions and labour shortages will be less transitory than flagged..

Globally there have now been more than 50 separate interest rate hikes this year, led by emerging market inflation hotspots like Brazil and Russia.

As companies recover from the global pandemic, credit markets have seen the return of the “junk” Euro corporate debt with a Triple C rating or less, which is far away from China’s turmoil.

For a graphic on Global FX year to date:

https://fingfx.thomsonreuters.com/gfx/mkt/znvnebgexpl/Pasted%20image%201632960663031.png