Traders around the world rush to place bets ahead of Fed decision

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(Bloomberg) — Some investors have a message for anyone looking to bet big for one of the Federal Reserve’s most pivotal policy meetings this year: Don’t do it, or risk getting burned.

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“Short stocks and bonds,” said Stephen Miller, a four-decade market veteran and investment advisor at GSFM, a division of Canada’s CI Financial Corp. in Sydney. “I would also close long dollar positions — the next 24 hours are so uncertain if the market has already worked itself into such pessimistic foam in the meeting.”

Miller’s caution is reflected in trade bureaux 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 bent on cooling rising price pressures. Markets are charging a 75 basis point rate hike with a chance of a full percentage point hike — a risk that would 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 both set to discuss interest rates on Thursday. The ratings could lead to major swings in global markets as traders try to understand where borrowing costs are headed after the recent outrageous rises by the Riksbank and the Bank of Canada.

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The jitters are flashing through virtually every asset class: Expected swings in US equities are near levels last seen in mid-July, while those for Treasuries have risen to a month-long 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.

hoarding money

And it is not only the size of the interest rate hike that is central. The main message for investors will likely be more about the Fed’s projections for where key rates will peak.

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

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“We’ve had an average of 3% plus cash in our portfolios for the past 10 years — we’re going into this meeting at about 7.5%,” said Chen, who oversees the asset manager’s $500 billion ($498 billion). “There is certainly an understandable lack of conviction,” as investors wait to hear from Fed Chair Jerome Powell.

Geopolitical risks also complicate the picture after Russian President Vladimir Putin declared a “partial mobilization” and called in 300,000 reservists in a major escalation of his flurry of invasion of Ukraine. The euro fell to a two-week low.

Euro expands losses as Putin’s war threats add to Fed jitters

‘Don’t try anything’

Others, such as Steen Jakobsen, chief investment officer at Saxo Bank A/S, plan to counter any market turbulence by holding existing positions. Meanwhile, leveraged investors are raising short bets on two-year US Treasury contracts to the most bearish level since June, data from the Commodity Futures Trading Commission shows.

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“We don’t do anything else at 75 or 100 or even 25,” Jakobsen said. “What we have to balance over time is what portion of economies need capital and that won’t be based on a single event risk like the FOMC.”

By contrast, macro funds have built up short positions in US equities since the last US inflationary pressure, according to an analysis by Nomura Holdings Inc.

For Woori Bank’s Min Gyeong-won, taking a strong position in the assembly – existing or new – can lead to losses. His advice: sit down and analyze the Fed’s messages before taking bold action.

“Don’t try anything before the meeting,” said Min, an economist in Seoul. “Sleep early, wake up early and watch Chairman Powell’s speech, and go get your morning cup of coffee.”

(Updates with developments in Ukraine in ninth paragraph)

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