Global investors are bracing for U.S. stagflation as 70% expect below trend growth and above trend inflation in the next 12 months. Concerns are justified by weak U.S. labor market data, rising core inflation, and producer prices. Despite this, stocks are at record highs and bond markets appear calm.

In the face of potential stagflation, investors are warned about the impact on longer-dated bonds, with fears of eroding fixed interest payments. The correlation between interest rates and bond curves in G7 economies means a selloff in the U.S. could affect other markets. If inflation persists, short-dated bonds could also suffer.

With expectations of U.S. growth slowing and stagflation looming, investors are making strategic moves. Fidelity International bought put options on small cap stocks, anticipating a decline. Historically, world stocks have fallen during U.S. manufacturing contraction and higher prices. Despite this, markets are currently optimistic about big tech earnings.

As stagflation looms, some investors are selling the dollar in anticipation of weakness. A weak economy can devalue a currency, while persistent inflation erodes its purchasing power. The euro and other currencies have strengthened against the dollar this year. Stagflation could prompt further currency shifts.

Investors are considering alternative assets amid stagflation risks. Gold remains a popular choice, offering protection against various risks. Short-dated inflation-linked bonds and complex derivatives like inflation swaps are gaining interest. The U.S. two-year inflation linked swap is near its highest level in over two years.

Read more at Yahoo Finance: What US stagflation risks mean for world markets