(Bloomberg) — Some investors have a message for anyone looking to bet long before one of the most important Federal Reserve policy meetings of the year: Don’t or risk getting burned.
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“Close shorts in stocks and bonds,” said Steven Miller, a four-decade market veteran and investment consultant at GSFM, a unit of Canada’s CI Financial Corp. in Sydney. “I would also close long dollar positions – the next 24 hours are so uncertain when the market has already turned into such a pessimistic froth in the meeting.”
Miller’s caution was echoed across trading desks from Woori Bank in Seoul to BNP Paribas Asset Management in Hong Kong as investors braced for another interest rate hike by the Federal Reserve, determined to cool mounting price pressures. Markets are pricing a 75 basis point rate hike with a chance of a full percentage point increase – a risk that would only add to fears of a recession.
The Fed’s decision comes during an action-packed week on the policy front, with the Bank of Japan and the Bank of England scheduled to discuss rates on Thursday. The reviews could send world markets reeling as traders try to come to grips with where borrowing costs are headed after recent excessive hikes by the Riksbank and the Bank of Canada.
Nervousness flashed across nearly every asset class: Expected swings in U.S. stocks are close to levels last seen in mid-July, while Treasuries jumped to a one-month high. Implied overnight volatility also rose across all major currency pairs, highlighting uncertainty about how currency markets will react to the Fed’s decision.
And it’s not just the size of the rate hike that’s in focus. The key message for investors is likely to be more about the Fed’s projections of where interest rates will peak.
Amid all this uncertainty, Zhikai Chen, head of Asia and global emerging markets at BNP Hong Kong, has been hoarding money to protect his portfolio.
“We’ve averaged 3% plus cash in our portfolios over the last 10 years – we come into this meeting at about 7.5%,” said Chen, who helps oversee the 500 billion euro ($498 billion) asset manager. “There’s definitely an understandable lack of conviction” as investors wait to hear from Fed Chairman Jerome Powell.
Geopolitical risks are also complicating the picture after Russian President Vladimir Putin announced a “partial mobilization,” calling up 300,000 reservists in a major escalation of his waning invasion of Ukraine. The euro fell to a two-week low.
Euro extends losses as Putin’s military threats add to Fed jitters
“Don’t try anything”
Others, such as Steen Jacobsen, chief investment officer at Saxo Bank A/S, plan to ride out any market turbulence by holding onto existing positions. Meanwhile, leveraged investors increased short bets on the two-year U.S. Treasury to the lowest level since June, data from the Commodity Futures Trading Commission showed.
“We don’t do anything different at 75 or 100 or even at 25,” Jacobsen said. “What we need to balance over time is which part of the economy needs capital, and that’s not going to be based on risk from a single event like the FOMC.”
In contrast, macro funds have been building short positions in U.S. stocks since the latest U.S. inflation stamp, according to analysis by Nomura Holdings Inc.
For Woori Bank’s Min Gyeong-won, taking any strong position in the meeting – existing or new – could lead to losses. His advice: sit down and analyze the Fed’s announcements before taking bold action.
“Don’t try anything before the meeting,” said Min, an economist in Seoul. “Sleep early, wake up early and review Chairman Powell’s speech and go get your morning cup of coffee.”
(Updates with developments in Ukraine in the ninth paragraph)
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