Global Markets Weekahead: 'good riddance third quarter, hello fourth quarter'

After the battering that stocks, commodities and many currencies have taken in the past week, there is little wreckage to cling to at the end of a traumatic third quarter. October, traditionally the slow start of a year-end risk rally, cannot come soon enough.
Not that it is guaranteed, of course. Or that it might even come close to making up for the turmoil since July. With a week to go, the quarter is the second worst for global stocks in the 23-3/4 years that the MSCI all-country world share index has been running. The index is down nearly 20 percent in the past three months but, perhaps more pertinently, has lost some 23 percent since hitting a three-year high in May - putting it, by tradition, into bear market territory.
The coming week is not likely to offer too much to switch that around.
Policymaker speeches may prod more market volatility and an Italian debt auction will take the temperature of the euro zone crisis, but there is little prospect of a striking move forward in the battle to dig Europe and the global economy out of trouble.
The Reuters asset allocation poll for September on Thursday should show how investors have positioned themselves during the most recent blast of risk aversion.
One big issue will be whether large investors see the current market turmoil as part of a deeper, long-lasting imbalance in the world financial system, or as an opportunity.
Aaron Gurwitz, chief investment officer of Barclay's Wealth, said during the past week that equities were now cheap even if the developed economies slip into a mild recession.
Companies will begin reporting their Q3 earnings in a week or so.
Thomson Reuters Proprietary Research shows S&P 500 company earnings are expected to have grown 13.7 percent year-on-year in the quarter. That would follow an 11.9 percent increase in the second quarter.
But that's for later. What is exercising investors at the moment is the state of the world economy.
The Federal Reserve's gloomy assessment during the past week combined with poor manufacturing surveys in other major players, notably China and the eurozone.
Chris Probyn, chief economist at State Street Global Advisors, described developed world economies this week as "like flying an aeroplane just at about stall speed and very close to the ground."
His view was that this situation will remain for a while, with developed economies pulling world growth down to around 4 percent next year, slightly higher than trend but nearly all the result of emerging economies.
But the United States, Europe and Japan are all suffering from demand that has been damaged rather than simply delayed as is normaly the case in downturns. This means growth is not responding to monetary policy.
Various September sentiment and inflation reports will provide more evidence of how close Europe in particular is to a new recession.
"Imagine driving a sled," Probyn said. "You can rein in the dogs or let them out. Well in the global financial crisis a whole bunch of those dogs was shot. Demand was destroyed and it doesn't matter how much you let out those reins - nothing is running."
That might go some way to explain why financial markets did not react positively to the Fed's lauching "Operation Twist" in the past week, essentially deciding to sell or not roll over short-term debt and buy long-term bonds instead in order to keep borrowing costs low.