The signs of an extraordinary time were everywhere. The Federal Reserve carried out its third consecutive seventy-five basis point rate hike, while Japan stepped in to support the yen for the first time since 1998. The pound fell to its lowest level in 37 years against the dollar after the country’s new finance minister announced historic tax cuts and a huge increase in borrowing.
“It’s hard to know what will break where, and when,” said Mike Kelly, head of multiple assets at PineBridge Investments (US). “Previously it was thought that a recession would be short and shallow. Now we are shedding all that and thinking about the unintended consequences of much tighter monetary policy.”
Stocks plunged everywhere. The Dow Jones Industrial Average nearly joined the S&P 500 and Nasdaq in a bear market, while bonds tumbled to their lowest level in years as investors recalibrated their portfolios for a world of persistent inflation and rising interest rates.
The US dollar, which hit a 20-year high against a basket of currencies, dominated the scene, buoyed in part by investors seeking shelter from wild market swings.
“Exchange rates … are now violent in their movements,” said David Kotok, president and chief investment officer at Cumberland Advisors. “When governments and central banks get busy setting interest rates, they shift volatility to currency markets.”
So far, the collapses in all asset classes have attracted few bargain hunters. In fact, many believe things can only get worse, as tighter monetary policy around the world increases the risks of a global recession.
“We remain cautious,” said Russ Koesterich, who oversees the Global Allocation Fund for Blackrock, the world’s largest asset manager, noting that its equity allocation is “well below benchmark” and that it is also cautious on bonds.
“I think there’s a lot of uncertainty about how quickly inflation is going to come down, there’s a lot of uncertainty about whether or not the Fed is going to go all the way with a tightening campaign as aggressively as she signaled this week.”
Kotok says it is conservatively positioned with high liquidity levels. “I would like to see enough selloff to make entering the US stock market attractive,” Kotok said.
The fallout from the turbulent week exacerbated trends for stocks and bonds that had been in place all year, pushing down prices for both asset classes. But the bleak outlook meant it still wasn’t cheap enough for some investors.
“We believe the time to go long in equities is still ahead of us, until we see signs that the market has bottomed out,” said Jake Jolly, senior investment strategist at BNY Mellon, who increased its allocation to short-term sovereign bonds.
“The market is getting closer and closer to the assessment of this recession which is widely expected but not yet fully assessed.”
Tough week for global equities
Goldman Sachs strategists on Friday lowered their year-end target for the benchmark US stock index, the S&P 500, from 4,300 to 3,600. The index was last at 3,693.23.
Bond yields, which move inversely to prices, jumped around the world. Yields on the US benchmark 10-year bond hit their highest level in more than 12 years, while the yield on German two-year bonds rose above 2% for the first time since late 2008. In the UK , five-year gilts jumped 50 basis points — their biggest one-day jump since at least late 1991, according to Refinitiv data.
“At some point, fears will shift from inflation to growth,” said Matthew Nest, global head of active fixed income at State Street Global Advisors, who believes bond yields have reached such a high level that they are starting to look low. “pretty attractive”.
Central banks are stepping up their fight against inflation 
Investors fear that things will get worse before they get better.
“The question is no longer whether we are going to enter a recession, but rather how deep the recession will be, and whether we are at risk of having some form of financial crisis and a major liquidity shock on a global level. said Mike Riddell, senior fixed income portfolio manager at Allianz Global Investors London.
With monetary policy tending to act with a lag, Riddell believes renewed central bank optimism means the global economy will be even weaker by the middle of next year.
“We believe the markets are still massively underestimating the impending drag on global economic growth,” he said.