Stock market investors batten down hatches for volatile end to 2014

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 S&P 500 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 per cent and many expect more volatility to come.

A Reuters poll of investment managers around the world published on Sept. 30 found a sense of caution manifested in people putting their biggest bets since March on bonds, which are typically regarded as a shelter against market volatility.

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, 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 be good for American consumers who see their international purchasing power increase, it is proving disruptive to financial markets.

A new period of dollar strength risks drawing American investment back home, fearful of heavy currency losses on overseas assets. This in turn can affect U.S corporations because it devalues their overseas earnings in dollar terms and risks making American exports less competitive.

Some investors nonetheless say the overall economic outlook remains benign. The Fed raising interest rates is a symptom of robust economic growth, they say, even if it carries risks.