By Mike Dolan
LONDON (Reuters) - Investors have been braced for a stormy September for so long now it's getting difficult to see this month's stiffening gales blowing them off course for long.
September - traditionally the worst month of the year for U.S. stocks with an average loss since 1928 of 1.1 percent - does look rough again. It's just a wonder who's left to surprise.
Even a cursory glance at event diaries during the Spring would already have given fair warning of what the final month of the third quarter was brewing.
And markets have for months been shaping up for the first reduction of the U.S. Federal Reserve's bond buying program, or 'quantitative easing' on the 18th - with QE-buffeted emerging markets feeling the sharpest adjustment. German elections four days later could bring unfinished euro zone business - such as unresolved Greek bailout funding - back to the policy table.
U.S. budget wrangling also is set to resurface through the month as the Federal debt ceiling needs to be raised by mid-October to avoid default. And a possible U.S.-led strike on Syria, with all its potential impact on regional stability and world energy prices, emerged last month as a wild card.
But after several weeks mulling outcomes, postponing debt and equity issuance, hedging bets and diversifying portfolios, can there be any investors left unawares, and how much of all this is accounted for in prices?
Implied volatility gauges have popped higher , though only just back to June levels under 20 percent for Wall Street stocks and only slightly above long-term averages.
And aside from selected hard-hit emerging markets and currencies, such as Turkish stocks and India's rupee, most other major equity and bond markets have had less than 3 percent of froth blown away over the past two weeks.
Yet, the relatively limited if choppy August moves mask a much bigger global markets adjustment since May, when Fed 'tapering' was first mooted and ripped through many assets.
Perhaps the best illustration of that is the rise in investment fund cash holdings to their highest levels in 12 months in August, according to Reuters asset allocation polls.
Is that enough? The key question is whether the dominant Fed event has been finally discounted.
Strategists at Morgan Stanley believe it probably is, estimating that many of battered emerging debt markets are already priced as if 10-year U.S. Treasury yields were as high as 3.2 percent - some 30 basis points above current levels.
Reassured by evidence the United States, Britain, the euro zone and Japan have assumed 'global growth leadership' from flagging emerging world, as well as reduced anxiety about China's slowdown, the U.S. bank feels investors are already sufficiently strapped in for this month's bumpy ride.
"The market has become much cleaner and we certainly don't have the complacency that we saw back in April or May," said Joachim Fels, Morgan Stanley's chief global economist.
"What we've seen over the last one or two weeks is that risk appetite among our big clients has started to come back, (but) it's not the 'naked' buying that we had earlier this year."
David Folkerts-Landau, Deutsche Bank's group chief economist, also feels the month was navigable and urged clients on Tuesday to keep the faith with a recovery of the developed world economies.
"Ultimately, we do not see a systemic threat emerging from these events and expect any ‘September struggle' to be short-lived," he said.
For asset managers themselves, few doubt potential for major disturbance - it's just they remain outside risks.
If the Fed plays to existing expectations, it's difficult to spot the shock factor. U.S. debt ceiling spats are noisy but mostly get resolved at 11th hours. More euro zone rumblings are in store for sure, but there's little to change the big, bloc-wide picture. And while a widening regional conflict surrounding Syria would force a rethink, best guesses for now focus on limited U.S.-led strikes on the country at most.
What's more, elevated cash holdings remain inherently unstable for fund managers as long as inflation-adjusted short-term interest rates in West remain so deeply negative and the broader economy is still growing. And once 'safe' sovereign bonds are hardly a stress-free refuge at this juncture.
"Holding a high cash weighting is very sensitive at a time of record low interest rates," said Tom Becket, Chief Investment Officer at Psigma Investment Management.
"We are actively seeking good opportunities to use that cash in the months ahead," he said, adding that the funds were considering increases to emerging assets and European equities.
While September may traditionally be the worst month of the year for stocks, average returns from the past 85 years for each of the final three months of the year are all positive.
(Editing by Ron Askew)
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