©Archyde.com. FILE PHOTO: A staff member at foreign exchange trading firm Gaitame.com looks at a monitor showing a chart of the Japanese yen’s exchange rate once morest the US dollar following Japan intervened in the currency market.
By Davide Barbuscia and Dhara Ranasinghe
NEW YORK/LONDON, Sept 25 (Archyde.com) – Global investors are bracing for a new wave of market chaos following a week rocked asset prices around the world, as central banks and governments step up their fight once morest inflation.
The signs of extraordinary times were everywhere. The Federal Reserve made its third consecutive interest rate hike by 75 basis points, while Japan stepped in to prop up the yen for the first time since 1998.
Sterling fell to a new 37-year low once morest the dollar following the country’s new finance minister announced historic tax cuts and a huge increase in borrowing.
“It’s hard to know what will break, where and when,” said Mike Kelly, head of multi-assets at PineBridge Investments in the US. “Before it was thought that a recession would be short and shallow. Now we are throwing that overboard and thinking regarding the unintended consequences of a much tighter monetary policy.”
Stocks plummeted everywhere. The Industrial Average came close to joining the and in a bear market, while bond prices fell to their lowest level in years, as investors recalibrated their portfolios to a world of persistent inflation and rising interest rates. .
Above all this is the US dollar, which has surged to its highest level in 20 years once morest a basket of currencies, fueled in part by investors seeking shelter from wild market swings.
“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 set regarding setting interest rates, they feed volatility into the currency markets.”
For now, sales across asset classes have attracted few opportunity buyers. In fact, many believe things are going to get worse as monetary policy tightening around the world increases the risks of a global recession.
“We remain cautious,” said Russ Koesterich, who oversees Blackrock’s Global Allocation Fund (NYSE:), the world’s largest asset manager, noting that its allocation to equities is “well below the benchmark.” and that he is also cautious with fixed income.
“I think there’s a lot of uncertainty regarding how quickly inflation is going to come down, there’s a lot of uncertainty regarding whether or not the Fed will continue with as aggressive a tightening campaign as they signaled this week.”
Kotok said he is conservatively positioned with high levels of cash. “I would like to see enough of a selloff to make the entry attractive in the US stock market,” he said.
The fallout from the eventful week exacerbated trends in stocks and bonds that have held throughout the year, putting downward pressure on prices of both asset classes. But murky prospects meant they still weren’t cheap enough for some investors.
“We think it’s still time to go long equities until we see signs that the market has bottomed,” said Jake Jolly, senior investment strategist at BNY Mellon, which has been increasing its allocation to sovereign bonds. Of short duration.
“The market is getting closer to pricing in this recession that is widely expected, but not yet fully priced in”
On Friday, strategists at Goldman Sachs (NYSE:) lowered their year-end target for the benchmark S&P 500 US stock index to 3,600 from 4,300. The index closed Friday at 3,693.23.
Bond yields, which move inversely with prices, rose around the world. Benchmark 10-year US Treasury yields hit their highest level in more than 12 years, while the German two-year bond yield topped 2% for the first time since late 2008.
In the UK, five-year gilts rose 50 basis points – their biggest one-day jump since at least the end of 1991, according to Refinitiv data.
“At some point fears will shift from inflation to growth,” said Matthew Nest, global head of active fixed income at State Street (NYSE:) Global Advisors, who believes that bond yields have moved so high that they are starting to look “quite attractive.”
Investors fear things will get worse before they get better.
“The question now is not whether we’re going to go into a recession, but how deep the recession is going to be, and whether we might have some kind of financial crisis and a big global liquidity shock,” said Mike Riddell, senior fixed income portfolio manager. of Allianz (ETR:) Global Investors in London.
Since monetary policy tends to work late, Riddell reckons the renewed hawkishness of central banks means the global economy will be even weaker by the middle of next year.
“We are of the view that markets continue to grossly underestimate the looming global economic growth hit,” he said.
(Reporting by Davide Barbuscia, Saqib Iqbal Ahmed and David Randall in New York and Dhara Ranasinghe in London; Writing by Lewis Krauskopf; Editing in Spanish by Ricardo Figueroa)