Traders around the world are rushing to close bets ahead of the Fed’s decision

Traders around the world are rushing to close bets ahead of the Fed’s decision

(Bloomberg) — Some investors have a message for anyone looking to bet big ahead of one of the most critical Federal Reserve policy meetings this year: don’t or risk getting burned.

Most Read by Bloomberg

“Close the bids on stocks and bonds,” said Stephen Miller, a market veteran and four-decade investment adviser at GSFM, a unit of Canada’s CI Financial Corp. in Sydney. “I would also close dollar longs — the next 24 hours are so uncertain when the market has already worked itself into such a pessimistic bubble in the session.”

Miller’s reticence was echoed on trading desks from Woori Bank in Seoul to BNP Paribas Asset Management in Hong Kong as investors braced for another huge rate hike by the U.S. Federal Reserve, which is aimed at cooling rising price pressures. Markets are pricing in a 75 basis point rate hike with the possibility of a full percentage point hike — a risk that will only heighten 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 interest rates on Thursday. The ratings are likely to fuel big swings in global markets as traders try to figure out where borrowing costs are headed after recent big hikes by the Riksbank and the Bank of Canada.

Nervousness is flickering across nearly every asset class: expected swings in US stocks are nearing levels last seen in mid-July, while those in bonds have jumped to a one-month high. Overnight implied volatility has also risen across all major currency pairs, highlighting uncertainty about how currency markets will react to the Fed’s decision.

Cash hoarding

And, it’s not just the size of the rate hike that’s at stake. The key message for investors will likely be more on the Fed’s projections of where the policy rate will peak.

In the wake of all this uncertainty, Zhikai Chen, BNP’s head of Asia and global emerging markets equities in Hong Kong, is hoarding cash to protect his portfolio.

“We’ve averaged 3% plus cash in our portfolios over the past 10 years — we’re going into this meeting at about 7.5%,” said Chen, who helps oversee 500 billion euros ($498 billion) in asset manager. “There is certainly 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’s War Threats Add to Fed Jitters

“Don’t try anything”

Others, like Steen Jakobsen, chief investment officer at Saxo Bank A/S, plan to ride out any market turmoil by holding onto existing positions. Meanwhile, leveraged investors increased short bets on two-year U.S. Treasury bonds to the most bearish level since June, according to data from the Commodity Futures Trading Commission.

“We don’t do anything different at 75 or 100 or even 25,” Jakobsen said. “What we need to rebalance over time is which part of the economies needs capital, and that’s not going to be based on a single event risk like the FOMC.”

In contrast, macro funds have built short positions in U.S. stocks since the latest release of U.S. inflation, according to analysis by Nomura Holdings Inc.

For Woori Bank’s Min Gyeong-won, taking any strong position in the session — existing or new — can lead to losses. His advice: sit back 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 coffee.”

(Updates on developments in Ukraine in the ninth paragraph)

Most Read by Bloomberg Businessweek

©2022 Bloomberg LP

Leave a Reply

Your email address will not be published.