Not only did they have to digest the possibility of the tapering of quantitative easing in the US, but shortly afterwards, interbank borrowing rates in China reached extremely elevated levels and – just for good measure – problems in Greece re-emerged.
This resulted in a fairly rare scenario: all asset classes fell, from equities to government bonds through to gold.
With the interesting exception of the US, many stock markets, including the UK, have now witnessed a painful correction of more than 10 per cent from their recent highs.
Performance of indices in 2013
Source: FE Analytics
Ordinarily, one would expect bonds and equities to move in opposite directions. Generally, when investors become more risk-averse, they tend to typically favour bonds over equities and vice versa when they are more optimistic.
Last week’s moves are a reflection of the unprecedented levels of central bank intervention in the global economy, and while they have helped to mitigate the worst of the effects of the financial crisis, they have also distorted asset values to a currently unquantifiable extent.
Nowhere is this more apparent than in the emerging markets, which, having seen huge investment inflows by growth-driven investors, have now seen a material and painful change in fortunes.
By way of illustration, emerging markets are now down by an average of 10.38 per cent year-to-date, relative to the MSCI World index, which is still up some 8.89 per cent.
Performance of indices in 2013
Source: FE Analytics
The stock markets of the leading emerging countries, the BRICs, have turned in an even worse performance: Brazil currently headlines, with a 18.27 per cent year-to-date decline.
In China, the sudden moves in the interbank markets were effectively self-inflicted as the central bank withdrew funding to the banking system in an attempt to bring lending to heal and clampdown on shadow banking. However, as with other large emerging markets, domestic issues are increasingly challenging growth prospects.
At this point, it needs to be emphasised that the Federal Reserve's chairman Ben Bernanke has signalled he is only looking at slowing down the rate of QE with the strong proviso that this will be driven by economic data.
Thus, having been such a material buyer, bond markets are starting to consider a world without central bank demand, and as such, yields have been rising. We would speculate that the Fed would not have expected such a violent outcome to this message.
Whether this now marks the turning point in the bond market is highly uncertain. It is clear that exiting the QE experiment will be immensely challenging and that asset prices will have to adjust accordingly.
Nevertheless, and perhaps perversely, the more adverse the reaction, the less likely it is that QE will be cut back. By way of illustration, one of the key inputs into the US recovery has been the improvement in the housing market, but the rise in government bond yields has already started to drive up the cost of mortgages, a move which will likely temper the housing recovery should the trend persist.
In short, the movements in asset prices, particularly those of government bonds, are already acting as a form of tightening which, if they persist, will inevitably impact the real economy.
A return to normal rates of economic growth still feels a long way away as the world continues to struggle on with the legacy of the financial crisis. As such, a material withdrawal of support from central banks now seems increasingly unlikely.
Bernanke also said that should there be a sharp deterioration in the economy, then the pace of purchases may actually rise. Paradoxically, the movements of markets over the last few weeks arguably make any winding down of QE much less likely, particularly given the tightening effects of mortgage rates on the enormously important US housing market.
Could the QE experiment soon be back on track and the recent nightmare be behind us? This then poses the question, will the recent market movements be reversed – or is this just a dream?
Joe Dyer is a fund manager at Rowan Dartington. The views expressed here are his own.