(Bloomberg) — Some investors have a message for anyone looking to make a big bet ahead of one of the Federal Reserve’s biggest policy meetings this year: Don’t or risk getting burned.
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“Go short stocks and bonds,” said Stephen Miller, a four-decade market veteran and investment consultant at GSFM, a unit of CI Financial Corp. from Canada to Sydney. “I would also close long dollar positions – the next 24 hours are so uncertain when the market has already foamed so pessimistically in the meeting.”
Miller’s caution is reflected on trading desks from Woori Bank in Seoul to BNP Paribas Asset Management in Hong Kong, as investors brace for another rate hike from a Federal Reserve determined to cool pressure on prices. Markets are pricing in a 75 basis point rate hike with the possibility of a full percentage point increase, a risk that would only add to recession fears.
The Fed’s decision comes during an action-packed week on the policy front, with the Bank of Japan and the Bank of England both scheduled to discuss rates on Thursday. The revisions could fuel big moves in global markets as traders try to monitor where borrowing costs are headed after recent huge hikes by the Riksbank and the Bank of Canada.
Nervousness is flickering across virtually every asset class: Expected swings in US stocks are nearing levels last seen in mid-July, while Treasuries have risen to an all-time high ‘a month. Implied overnight volatility has also risen across all major currency pairs, underscoring uncertainty over how currency markets will react to the Fed’s decision.
Hoarding cash
And it’s not just the size of the rate hike that’s in focus. The key message for investors will likely be more on the Fed’s projections of where the policy rate peak will hit.
In the wake of all this uncertainty, Zhikai Chen, head of Asia and global emerging markets equities at BNP Hong Kong, is hoarding cash to protect his portfolio.
“We’ve averaged 3% more cash in our portfolios over the past 10 years; we’re going into this meeting with 7.5%,” said Chen, who helps oversee 500 billion euros ($498 billion of dollars) to the asset manager. “There’s definitely an understandable lack of conviction” as investors wait to hear from Fed Chairman Jerome Powell.
Geopolitical risks also complicate the picture, after Russian President Vladimir Putin declared a “partial mobilization”, calling up 300,000 reservists in a major escalation of his invasion of Ukraine. The euro fell to a two-week low.
Euro extends losses as Putin war threats add to Fed worries
“don’t try anything”
Others like Steen Jakobsen, chief investment officer at Saxo Bank A/S, plan to ride out any market turbulence by maintaining existing positions. Meanwhile, leveraged investors are raising short bets on two-year U.S. Treasury contracts to the most bearish level since June, data from the Commodity Futures Trading Commission showed.
“We’re not doing anything different in 75 or 100 or even 25,” Jakobsen said. “What we have to balance over time is how much of the economies need capital and that’s not going to be based on a single event risk like the FOMC.”
Instead, macro funds have been accumulating short positions in U.S. stocks since the last U.S. inflation print, according to an analysis by Nomura Holdings Inc.
For Woori Bank’s Min Gyeong-won, taking any strong position in the meeting, existing or new, can lead to losses. His advice: sit down and analyze the Fed’s messages before taking any bold action.
“Don’t try anything before the meeting,” said Min, an economist in Seoul. “Sleep early, wake up early and review President Powell’s speech and go get your morning cup of coffee.”
(Updates with developments in Ukraine in the ninth paragraph)
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