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

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

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Stocks tumbled everywhere. The Dow Jones Industrial Average came close to joining the S&P 500 and Nasdaq in a bear market as bonds tumbled to their lowest level in years as investors re-calibrated their portfolios with a world of persistent inflation and rising interest rates. Read more

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 the Global Allocation Fund for Blackrock, the world’s largest asset manager, noting that his allocation to stocks is “well below the norm” and also cautioned 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 frenzied 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 buy into equities until we see signs that the market has bottomed,” said Jake Jolly, chief investment strategist at BNY Mellon, which has been increasing its allocation to short-term sovereign bonds.

“The market is getting closer and closer to pricing in this widely expected but not fully priced slump yet.”

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The strategists at Goldman Sachs on Friday cut their year-end target for the US stock index, the S&P 500 (.SPX)to 3600 from 4300. The index was last time at 3693.23.

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 – It is the largest single-day jump since at least late 1991, according to Refinitiv data.

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

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Investors fear things will get worse before they get better.

said Mike Riddell, fixed income portfolio manager at Allianz 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 impact of the upcoming global economic growth,” he said.

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Additional reporting by David Barbuschia, Saqib Iqbal Ahmed and David Randall in New York and Dara Ranasinghe in London; writing by Louis Krauskopf; Editing by Ira Yosipashvili, Megan Davis and Daniel Wallis

Our criteria: Thomson Reuters Trust Principles.

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