After a hectic week, global investors are licking their wounds and preparing for more chaos

Written by David Barbuscia and Dara Ranasinghe

the newYork/LondonSeptember 25 – Global investors are bracing for a new wave of market chaos after a week that shook asset prices around the world, as central banks and governments intensified their fight against inflation.

Signs of unusual times were everywhere. The Federal Reserve raised interest rates for the third time in a row by 75 basis points, while Japan intervened to support the yen for the first time since 1998.

Sterling fell to a 37-year low against the dollar after the country’s new finance minister announced historic tax cuts and a massive increase in borrowing.

“It’s hard to know what’s going to break, where and when,” said Mike Kelly, head of multiple assets at PineBridge Investments in the US. Previously, it was thought that a recession would be short and superficial. We are now ignoring that and thinking about the unintended consequences of tighter monetary policy.”

Stocks are down everywhere. The Dow Jones Industrial Average is close to joining the S&P 500 and Nasdaq in a bear market, while bond prices have fallen to their lowest level in years as investors recalibrate their portfolios in a world of persistent inflation and rising interest rates.

On top of all this, the US dollar rose to a 20-year high against a basket of currencies, driven in part by investors seeking shelter from wild market volatility.

“Currency exchange rates … are now violent in their movements,” said David Kotok, president and chief investment officer of Cumberland Advisors. “When governments and central banks are involved in setting interest rates, they transmit volatility to the currency markets.”

Currently, sales across asset classes have attracted quite a few opportunity buyers. In fact, many believe that things will only get worse as the tightening of monetary policy around the world increases the risks of a global recession.

“We remain cautious,” said Ross Koestrich, who oversees the BlackRock Global Allocation Fund, the world’s largest asset manager, noting that his equity allocation is “well below the norm” and that he is also cautious with fixed income.

“I think there is a lot of uncertainty about how quickly inflation will fall, and there is a lot of uncertainty about whether the Fed will continue with a strong tightening campaign as they indicated this week.”

Kotok said he has a conservative position with high levels of liquidity. “I would like to see enough selling to make an attractive entry in the US stock market,” he said.

The fallout from the eventful week exacerbated the trends in stocks and bonds that I held all year, putting downward pressure on the prices of both asset classes. But the vague expectations meant it wasn’t cheap enough for some investors.

Jake Jolly, senior investment analyst at BNY Mellon, which is increasing its allocation to short-term sovereign bonds.

“Market is approaching pricing in this widely expected recession, but not fully priced yet.”

On Friday, Goldman Sachs strategists cut their year-end target for the US S&P 500 stock index to 3,600 from 4,300. The index closed Friday at 3,693.23.

Bond yields, which move inversely with prices, have risen worldwide. The benchmark US 10-year Treasury yield reached its highest level in more than 12 years, while the German two-year bond yield exceeded 2% for the first time since late 2008.

In the UK, five-year British Treasuries rose 50 basis points — their biggest one-day jump since at least the end of 1991, according to Refinitiv data.

“At some point inflation concerns will shift to growth,” said Matthew Nest, active global head of fixed income at State Street Global Advisors, who believes bond yields have soared that they are starting to look “very cheap.” .

Investors fear things will get worse before they get better.

said Mike Riddell, director of fixed income portfolio manager for Allianz Global Investors in London.

Since monetary policy tends to act late, Riedel believes that renewed central bank tightening means the global economy will be weaker by the middle of next year.

“We believe that markets continue to significantly underestimate the impact of looming global economic growth,” he said.