Analysis: After a feverish week, global investors are nursing their wounds and preparing for more chaos

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NEW YORK/LONDON, Sept 25 (Reuters) – Global investors are bracing for more market chaos after a monumental week that sent asset prices tumbling around the world as central banks and governments intensified their fight against inflation.

The signs of the extraordinary times were everywhere. The Federal Reserve made its third straight hike of seventy-five basis points as Japan stepped in to support the yen for the first time since 1998. The pound slid to a new 37-year low against the dollar after that the country’s new finance minister has unleashed historic tax cuts and huge increases in borrowing.

“It’s hard to know what’s going to break, where and when,” said Mike Kelly, head of multi-asset at PineBridge Investments (US). “Before, we thought a recession would be short and shallow. Now we put that aside and think about the unintended consequences of much tighter monetary policy.”

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Stocks plunged everywhere. The Dow Jones Industrial Average nearly joined the S&P 500 and Nasdaq in a bear market while bonds fell to their lowest level in years as investors recalibrated their portfolios in a world of persistent inflation and rising stocks. interest rate. Read more

Above it all was the US dollar, which hit a 20-year high against a basket of currencies, thanks in part to investors seeking protection from wild market swings.

“Exchange rates … are now violent in their movements,” said David Kotok, president and chief investment officer at Cumberland Advisors. “When governments and central banks get busy setting interest rates, they shift volatility to currency markets.”

So far, the sell-off across all asset classes has attracted few bargain hunters. In fact, many believe things will get worse, as tighter monetary policy across the globe increases the risks of a global recession.

“We remain cautious,” said Russ Koesterich, who oversees the Global Allocation Fund for Blackrock, the world’s largest asset manager, noting that its equity allocation is “well below the benchmark” and that he is also cautious on bonds.

“I think there’s a lot of uncertainty about how quickly inflation is going to come down, there’s a lot of uncertainty about whether or not the Fed will go on an aggressive tightening campaign like they have. reported this week.”

Kotok said it is positioning itself conservatively with high levels of cash. “I would like to see enough selling to make entering the US stock market attractive,” Kotok said.

The fallout from the turbulent week exacerbated the trends in stocks and bonds that have been in place all year, pushing prices down for both asset classes. But the murky outlook meant they were still not cheap enough for some investors.

“We believe the time to go long in stocks is still ahead of us until we see signs that the market has bottomed out,” said Jake Jolly, senior investment strategist at BNY Mellon, who increased its allocation to short-term sovereign bonds.

“The market is getting closer and closer to pricing in this widely expected recession, but it’s not fully priced in yet.”

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Goldman Sachs strategists on Friday lowered their year-end target for the benchmark U.S. stock index, the S&P 500 (.SPX), to 3,600 from 4,300. The index was last at 3,693.23 .

Bond yields, which move inversely to prices, jumped around the world. Yields on the benchmark 10-year US Treasury rose to their highest level in more than 12 years, while the yield on two-year German bonds rose above 2% for the first time since late 2008 . In the UK, five-year gilts jumped 50 basis points – their biggest one-day jump since at least the end of 1991, according to Refinitiv data.

“At some point the fears will shift from inflation to growth,” said Matthew Nest, global head of active fixed income at State Street Global Advisors, who believes bond yields have risen so much they are starting to appear “rather attractive”.

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Investors fear that things will get worse before they get better.

“The question is no longer whether we go into a recession, it’s how deep the recession will be, and could we have some form of financial crisis and a major global liquidity shock,” he said. Mike Riddell, senior fixed income portfolio manager at Allianz Global Investors in London.

Because monetary policy tends to operate with a lag, Riddell believes renewed central bank hawkishness means the global economy will be even weaker by the middle of next year.

“We believe markets are still massively underestimating the coming hit to global economic growth,” he said.

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Reporting by Davide Barbuscia, Saqib Iqbal Ahmed and David Randall in New York and Dhara Ranasinghe in London; Written by Lewis Krauskopf; Editing by Ira Iosebashvili, Megan Davies and Daniel Wallis

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