Traders Around the World Rush to Close Bets Ahead of Fed Decision

Traders Around the World Rush to Close Bets Ahead of Fed Decision

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

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“Short on equities and bonds,” said Stephen Miller, a four-decade market veteran and investment adviser at GSFM, a unit of Canada’s CI Financial Corp in Sydney. “I would also be closing long dollar positions — the next 24 hours are so uncertain when the market has already worked into the rally so pessimistically.”

Miller’s warning echoes on trading desks from Woori Bank in Seoul to BNP Paribas Asset Management in Hong Kong as investors brace for another jumbo rate hike from a Federal Reserve that is biased towards cooling rising price pressures. Markets are pricing in a 75 basis point rate hike and 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 policy matters, with both the Bank of Japan and the Bank of England due to discuss rates on Thursday. The revisions could trigger major gyrations in global markets as traders try to determine where borrowing costs are heading after the recent big hikes by the Riksbank and the Bank of Canada.

Nervousness is flickering across nearly every asset class: potential swings in US stocks are near levels last seen in mid-July, while those on Treasuries have risen to a one-month high. Implied volatility has also increased overnight across all major currency pairs, reflecting uncertainty about how foreign exchange markets will respond to the Fed’s decision.

Depositing Money

And, the size of the rate hike is not the only focus. The key message for investors is likely to be the Fed’s projections of where the policy rate will peak.

In the wake of all this uncertainty, Zhikai Chen, BNP’s head of Asian and global emerging market equities in Hong Kong, is raising money to protect his portfolio.

“We’ve averaged 3% plus cash in our portfolios over the last 10 years — we’re going into this meeting with about 7.5%,” said Chen, who helps oversee 500 billion euros ($498 billion) at the asset manager. “There’s certainly 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 as he sharply ramps up his flagship invasion of Ukraine. The euro fell in two weeks.

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‘Try Nothing’

Others such as Steen Jakobsen, chief investment officer at Saxo Bank A/S, plan to ride out any market turbulence by keeping current jobs. Meanwhile, leveraged investors are taking short bets on two-year US Treasury contracts to their highest level since June, data from the Commodity Futures Trading Commission shows.

“We’re not doing anything different on a 75 or a 100 or even a 25,” Jakobsen 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 the risk of a single event like the FOMC.”

In contrast, macro funds have been taking short positions in US equities since America’s latest inflation print, according to an analysis by Nomura Holdings Inc.

In the case of Min Gyeong-won at Woori Bank, any strong position into the meeting – current or new – may be lost. His advice: sit back and parse 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 Chairman Powell’s speech, and get your morning cup of coffee.”

(Updates with developments in Ukraine in the ninth paragraph)

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