‘Close All Shorts’ Echoes Across Trading Rooms Ahead of Pivotal Fed Meeting

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

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“Close shorts on equities and bonds,” said Stephen Miller, a four-decade market veteran and investment consultant at GSFM, a unit of Canada’s CI Financial Corp. in Sydney. “I’d be closing long dollar positions too — — the next 24 hours are so uncertain when the market has already worked itself into such a pessimistic lather into the meeting.”

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Miller’s caution is mirrored across 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 bent on cooling surging price pressures. Markets are pricing in a 75-basis point rate increase with a chance of a full-percentage point rise — a risk that would only compound recession fears. 

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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 scheduled to discuss rates on Thursday. The reviews may fuel big gyrations in global markets as traders try to get a handle on where borrowing costs are headed after the recent outsized hikes by the Riksbank and the Bank of Canada.

Nervousness is flashing across virtually every asset class: expected swings in US stocks are near levels last seen in mid-July, while those on Treasuries have jumped to a one-month high. Overnight implied volatility has also surged across all major currency pairs, underscoring uncertainty over how foreign-exchange markets will react to the Fed’s decision. 

Hoarding Cash

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And, it isn’t just the size of the rate hike that’s in focus. The key message for investors will probably be more on the Fed’s projections for 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 hoarding cash to protect his portfolio. 

“We’ve averaged 3% plus cash in our portfolios in 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 definitely understandable lack of conviction” as investors wait to hear from Fed Chair Jerome Powell. 

‘Don’t Try Anything’

Others like Steen Jakobsen, chief investment officer at Saxo Bank A/S, plan to ride out any market turbulence by holding onto existing positions. Hedge funds echo the view, with leveraged investors ratcheting up short bets on two-year U.S. Treasury contracts to the most bearish level since June, data from the Commodity Futures Trading Commission show. 

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

For Woori Bank’s Min Gyeong-won, taking any strong position into the meeting — existing or new — may lead to losses. His advice: sit out and parse the Fed’s messaging 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 the speech of Chairman Powell, and go fetch your cup of morning coffee.”