Investors batten down hatches for volatile end to 2014

Thu Oct 2, 2014 5:31pm EDT
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By Chris Vellacott

LONDON (Reuters) - Global investors are starting to cut back on stock market positions, wary of a wave of financial market turbulence in the final quarter of 2014 as the era of cheap money ends.

The tide turned abruptly this week with the close of the third quarter and major stock markets have lurched down at the start of October, a month associated with previous market shakeouts including the 1929 and 1987 crashes.

Two weeks earlier, the benchmark S&P 500 index .SPX reached an all-time high, prompting many investors to speculate that shares were too expensive by most historical measures. Since reaching that peak on Sept. 19, Wall Street has dropped nearly 4 percent and many expect more volatility to come.

"The last three years have been quite good for equities but now it's going be a lot harder. Unfortunately you've now got to invest with seat-belts on... You have to accept more volatility. We expect the next six months to be very challenging," said Remi Ajewole, a multi asset fund manager at Schroders, one of Europe's largest independent investment groups.

Markets are starting to price in the U.S. Federal Reserve calling time on the easy money policies which it brought in as economic life support after the financial crisis of 2008.

Quantitative easing, a pillar of this policy which involved the Fed buying up bonds to add liquidity to the financial system, is due to end later this month.

A second aspect, keeping official interest rates in the United States at historic lows, is also expected to end within months as the world's largest economy strengthens.

The prospect of a relative scarcity of U.S. dollars has driven the currency higher in recent weeks. While this may seem a benign development to American consumers who see their international purchasing power increase, it is proving disruptive to financial markets.   Continued...

A street sign is seen in front of the New York Stock Exchange on Wall Street in New York, February 10, 2009. REUTERS/Eric Thayer