(Bloomberg) -- If you thought markets were choppy before, things are about to get much worse.
So say investors who reckon the rally that’s bolstered risk assets over the past month is a blip in a bear market that’s likely to worsen from here. The trigger? A resolutely hawkish Federal Reserve and central bank peers who are planning to raise interest-rates at all costs to combat the hottest inflation in a generation.
Monday’s trading give credence to their views: equities, developed and emerging-market currencies and even haven Treasuries tumbled as fund managers digested Fed Chair Jerome Powell’s stern message that rates would keep going up even if that spells pain for households and businesses everywhere.
Goldman Sachs Group Inc. pegs the dollar as the main beneficiary amid the market chaos, Westpac Banking Corp. warns of fresh yen pressure and BNP Paribas Wealth Management sees more losses for developing-nation assets.
“The environment has changed,” said Kim Fournais, founder and chief executive of Saxo Bank A/S. “I just have a hard time seeing how this market, that is still trading close to all-time highs, can stay at those levels. There will be a period of great volatility.”
Almost every equity benchmark tumbled in Asia trading Monday as the fallout from the Fed’s hawkish rhetoric ripped through markets.
Yields on two-year Treasuries jumped to the highest since 2007 as traders ratcheted up rate hike bets, while the yen hurtled towards the closely-watched 140 level. The risk-sensitive Korean won led losses among emerging peers, tumbling to a 13-year low.
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Investors are showing no signs of slowing their selling spree, and a slew of upcoming key economic prints this week could provide fresh impetus to offload risk assets.
“Our quant model is giving a near-term sell signal on the equity markets with a risk of a complete unwind of the run up in markets we saw from mid-June,” said Gary Dugan, chief executive at the Global CIO Office in Singapore.
Dollar Dominance
The one asset that appears to be spared for now is the dollar.
A Bloomberg gauge of the dollar’s strength is edging closer to an all-time high broached last month, and strategists from Goldman Sachs to RBC Capital Markets say more strength lies ahead as investors pile into the world’s reserve currency for safety.
“Tightening pain equals dollar gain,” Goldman strategists including Kamakshya Trivedi wrote in a note. The Fed’s uncertainty on allowing a slowdown in the pace of rate hikes next month and rising European recession risk mean “the dollar still looks like the clearest long in the near-term.”
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It’s a sentiment shared by Brown Brothers Harriman & Co.’s Win Thin.
“The Fed has made it clear that recession risks will not deter it from its fight against inflation,” the New York-based head of currency strategy wrote in a note. “Our broad macro calls remain in place: stronger dollar, weaker equities, and a flatter U.S. yield curve.”