The rally that has bolstered risk assets over the past month was just a blip in a bear market that is likely to worsen from here.

That’s the view of investors who seem to be finally getting the message that a resolutely hawkish Federal Reserve and central bank peers are planning to raise interest rates at all costs to combat the hottest inflation in a generation.

Monday’s trading gave credence to that prospect: 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 it spells pain for households and businesses everywhere.

“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.”

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.

Almost every equity benchmark tumbled in Asia trading Monday as the fallout from the Fed’s hawkish rhetoric ripped through markets. S&P 500 futures dropped as much as 1.3%, indicating that US stocks are poised to extend a rout that saw the index erase $1.2 trillion on Friday. 

Yields on two-year Treasuries jumped to the highest since 2007 as traders ratcheted up rate hike bets, while the yen hurtled toward the closely-watched 140 level. The risk-sensitive Korean won led losses among emerging peers, tumbling to a 13-year low.

Emerging markets look especially sensitive to Fed policy after a spate of recent inflows bolstered hopes of a recovery in risk assets.

Investors pumped a net $7.5 billion into nine Asia ex-China stock markets in August leading up to Jackson Hole -- the biggest inflow since the end of 2020, data compiled by Bloomberg showed. They turned net buyers of sovereign bonds from Indonesia to Thailand for the first time in months on hopes of a more calibrated rate tightening from the Fed.

That momentum is now at risk and a slew of upcoming key economic data this week could provide new 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.

The VIX Index surged on Friday, with the “fear gauge” ending the week at around 25 points and drifting higher again on Monday morning. However, the volatility index is only back at its average level for the year, a signal that Friday’s selloff in US stocks was less driven by panic selling and more by a sudden recalibration of rate expectations.

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.

Bloomberg's dollar gauge recovers from recent decline to resume uptrend
“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.”

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.”

--With assistance from Abhishek Vishnoi, Farah Elbahrawy and Jan-Patrick Barnert.

This article was provided by Bloomberg News.