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Markets have been shaken out of their 'summer slumber’: Barclays

Central bankers have given markets a rude awakening from their summer slumber but investors were not ready for an end to falling rates, according to a research note from Barclays.

"There are signs the post-Brexit 'goldilocks' backdrop of better growth data and falling rates may be turning and investors do not seem positioned for it," Keith Parker, global equity strategist at Barclays said in the note.

Global stocks are witnessing a substantial sell-off in the current trading session after U.S. markets closed sharply lower on Friday, with all three major indices posting their worst day since June 24, when the U.K. voted to leave the European Union.

Friday's sell-off was felt by Asian and European stocks Monday, that slipped amid concerns that the U.S. Federal Reserve could raise interest rates as soon as end of this month. But Barclays' Parker warns that investors are not ready for this change.


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"With U.S. equities futures positioning near the highs and short interest near the lows, investors do not seem to be positioned for a turn in the data cycle and a bottoming/ turn in the rates cycle. Additionally, equity volatility has been lower than other asset classes on a relative basis."

Parker also explained that with monetary stimulus reaching its limits and the Fed still trying to hike, hawkish central bank surprises remain a risk.

Volatility ahead

The situation in Europe, Japan and the U.K. is different from that of the US. While the Federal Reserve has taken on a more hawkish tone, central banks in other regions are still scrambling to put together monetary easing measures to stimulate growth in the economy.

However, Neil Dwane, Global Strategist and Chief Investment Officer Equity Europe at Allianz Global Investors told CNBC Monday that negative interest rates are not working in Europe.

"In Europe, negative interest rates are not working, it could be because people are now going, it doesn't matter how much Draghi prints, it is not helping the euro zone economy and the banks."

But markets are not just reacting on speculations about central banks but also political uncertainties. Barclays' Parker says politics are another source of risk with U.S. elections, Brexit negotiations and Italy's referendum.

The days after Brexit saw stocks and currencies slipping to all-time lows and erasing some $3 trillion in value. Although asset classes across the globe tried to reverse their losses, the sell-off in the last few days has brought back the risk factor in markets and analysts have warned investors of volatility.

"Markets took a nasty tumble on Friday and investors need to react. It is important to ignore flannel about this being a great opportunity to make money as it is also a great opportunity to make costly mistakes," Alastair Winter, chief economist at Daniel Stewart told CNBC via email.

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