Written by David Barbuscia and Dara Ranasinghe
NEW YORK/LONDON (Reuters) – Global investors are bracing for more market chaos after a massive week that sent asset prices down around the world, as central banks and governments intensified their battle against inflation.
Signs of extraordinary times were everywhere. The Federal Reserve raised interest rates for the third time in a row by seventy-five basis points while Japan stepped in 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 unleashed tax cuts Historic and huge increases 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 (US). “Before, the thinking was that a recession would be short and shallow. Now we get rid of that and think about the unintended consequences of tighter monetary policy.”
Stocks tumbled everywhere. It nearly joined the Nasdaq in a bear market as bonds fell to their lowest level in years as investors rebalanced their portfolios in a world of persistent inflation and rising interest rates.
The US dollar was on top of it all, rising to a 20-year high against a basket of currencies, buoyed in part by investors seeking shelter from extreme volatility in the markets.
“Currency exchange rates … are now violent in their movements,” said David Kotok, chairman and chief investment officer at Cumberland Advisors. “When governments and central banks set interest rates, they transfer fluctuations to the currency markets.”
At the moment, selling across asset classes has attracted quite a few bargain hunters. In fact, many believe that things will only get worse because tighter monetary policy around the world increases the risks of a global recession.
“We remain cautious,” said Ross Koestrich, who oversees BlackRock’s Global Allocation Fund (NYSE:) , the world’s largest asset manager, noting that his allocation to equities is “well below the benchmark,” and he is also cautious about bonds.
“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 go through with a strong tightening campaign as they indicated this week.”
Kotok said he is in a conservative position with high cash levels. “I would like to see enough selling to make it attractive to enter the US stock market,” Kotok said.
The fallout from the frenetic week exacerbated stock and bond trends that had been in place throughout the year, sending prices down for both asset classes. But the vague outlook meant it still wasn’t cheap enough for some investors.
“We think there is still time to go long in stocks until we see signs that the market has bottomed,” said Jake Jolly, chief investment analyst at BNY Mellon (NYSE:), who has been increasing his allocations for a while. Sovereign bonds.
“The market is getting closer and closer to pricing in this widely expected but not fully priced slump yet.”
A rough week in global stocks https://graphics.reuters.com/USA-STOCKS/GLOBAL/dwvkrxoxapm/chart.png
Strategists at Goldman Sachs (NYSE:) on Friday lowered their year-end target for the benchmark US stock index, the S&P 500, to 3,600 from 4,300. The index was last 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 rose above 2% for the first time since late 2008. In the UK, five-year Treasuries jumped 50 basis points – The biggest single-day jump since at least late 1991, according to Refinitiv data.
Matthew Nest, Global Head of Active Fixed Income, said: State Street (NYSE: Global Advisors), who believe bond yields have risen so high that they are starting to look “very attractive.”
Central banks ramp up their fight against inflation https://graphics.reuters.com/GLOBAL-CENTRALBANKS/klvykaanlvg/chart.png
Investors fear things will get worse before they get better.
said Mike Riddell, Director of Fixed Income Portfolio at Allianz (ETR:) Global Investors in London.
Since monetary policy tends to operate with a lag, Riedel estimates that renewed tightening from central banks means the global economy will be weaker by the middle of next year.
“We see that the markets are still significantly underestimated the size of the next blow to global economic growth,” he said.