Financial markets have been roiled by US President Donald Trump\u2019s announcement of tariffs on key trading partners, and investors are bracing for further volatility ahead.<\/p>\n
Here\u2019s how they are trading Trump\u2019s on-again, off-again trade war.<\/p>\n
Equities: \u2018impossible to avoid risk\u2019<\/h3>\n
Wall Street has been working since before November\u2019s presidential election on how it should position for tariffs. Investment banks have built baskets of stocks with the highest sensitivity to Trump\u2019s plans \u2014 mostly exporters such as carmakers and consumer goods companies \u2014 which allow their clients to bet on the impact of a trade war across a range of stocks.<\/p>\n
That happened on Monday, with companies such as General Motors and Ford in the US and Volkswagen and BMW in Europe falling on the tariff news<\/a>, before rallying when they were delayed.<\/p>\n The UBS Trump Tariff Losers basket, which tracks the performance of US shares negatively exposed to import tariffs on trading partners and which includes stocks such as Gap and Harley-Davidson, fell 6.6 per cent over the course of Friday and Monday, wiping out its gain for the year.<\/p>\n \u201cThe basket got walloped on Friday and was hit again [on Monday],\u201d said Andrew Slimmon, managing director at Morgan Stanley Investment Management. \u201cThe market underestimated the will of the president to use tariffs as a negotiating mechanism.\u201d<\/p>\n Some investors appear to have been ready for the weekend\u2019s escalation. According to a Goldman Sachs note, hedge funds have \u201cincreasingly shorted\u201d \u2014 or bet against \u2014 its own basket of tariff-exposed names in Europe. This basket includes Mercedes-Benz and BMW, which are down 3.8 per cent and 2.9 per cent respectively since Trump revealed his tariff plans, and beverage companies such as Diageo, which is down 7.6 per cent.<\/p>\n The long-short ratio \u2014 the balance of bets on rising and falling prices \u2014 of names in the Stoxx Europe Automobiles and Parts index has dropped to \u201cmultiyear lows\u201d, driven by accelerated selling by hedge funds since December, according to the bank. <\/p>\n Among hedge funds to be running bets against autos is London-based AKO Capital, which is short Daimler Truck, while Marshall Wace is short companies including BMW and Mercedes, data from Breakout Point shows. Marshall Wace declined to comment. AKO Capital did not respond to a request for comment. <\/p>\n However, fund managers are also wary of being too bearish, given the market\u2019s rapid reversal this week, the fact that the moves were less extreme than some had expected, and the fear of missing out on the long-running bull market.<\/p>\n In response to the \u201cconfusing\u201d situation, Drew Pettit, analyst at Citi, said it is better to hold a bit of \u201ceverything\u201d: growth, cyclical and defensive stocks. \u201cIt is impossible to avoid risk [assets] now, so you just need to manage it.\u201d<\/p>\n The Vix index, a measure of expected volatility known as Wall Street\u2019s \u201cfear gauge\u201d, rose on Monday. But, at 16, it remains below its long-term average, in a sign that, for now, investor nerves have not given way to panic.<\/p>\n However, the so-called \u201cVvix\u201d \u2014 which measures investor expectations of swings in the Vix \u2014 is trading above <\/a>its long-term average, suggesting investors are still wary that volatility could surge.<\/p>\n Short-term activity in the options market, meanwhile, has been frenzied, as traders try to hedge against or profit from the rapid market reversals, or second guess Trump\u2019s next move.<\/p>\n Trading in so-called zero-day options \u2014 contracts that expire the same day and which are used to bet on extremely short-term market moves \u2014 hit an all-time high of $1.4tn in notional value last Friday, according to data gathered by Rocky Fishman at Asym 500. <\/p>\n The Canadian dollar fell to its lowest against the US dollar since 2003 on Monday, as investors bet on faster Bank of Canada rate cuts, with a record 386,000 futures contracts tied to the Canadian dollar being traded, according to CME Group. <\/p>\n But it then recovered all of the day\u2019s losses on news of the postponement of tariffs. The Mexican peso had a similar reversal.<\/p>\n That has left traders in the currency market \u2014 often the first market to react to such news \u2014 similarly scratching their heads about how they should be positioned.<\/p>\n \u201cThe big question is whether [Trump\u2019s] got some master plan which involves taking things to the brink, or whether he\u2019s just making it up as he goes along,\u201d said Paul McNamara, investment director at GAM.<\/p>\n \u201cTrying to read that man\u2019s mind is just\u2009.\u2009.\u2009.\u2009It\u2019s just incredibly difficult. [You\u2019re] trying to trade on something which could go either way.\u201d<\/p>\n For now, McNamara said his team was \u201ca bit underweight\u201d emerging market currencies and slightly long the dollar \u2014 \u201cnot to a sufficient extent to really rescue us, if we get maximum tariffs, but on the other hand it\u2019s some protection\u201d if Trump were to back down again at the last minute. \u201cOur low conviction view is that things get worse,\u201d he said.<\/p>\n Currency options have been popular. Strategists at JPMorgan saw \u201csizeable demand\u201d for dollar options against the Canadian dollar and Mexican peso on Monday, \u201cas the risk of tariffs going into effect was too great for the market to ignore\u201d.<\/p>\n However, many investors are sticking with a bet on US dollar strength, the central \u201cTrump trade\u201d that has reshaped markets since the electoral odds began shifting in the Republican candidate\u2019s favour last year.<\/p>\n There was more demand on Monday for dollar \u201ccalls\u201d \u2014 options giving bullish traders the right to buy the US currency at an agreed price \u2014 than \u201cputs\u201d, options giving traders the right to sell the dollar, according to JPMorgan. <\/p>\n Some say currency markets are reacting in a more volatile and uncertain way than during Trump\u2019s first term. <\/p>\n \u201cEvent risk, particularly at weekends, has definitely grown,\u201d said Gary Prince, managing director for financial markets at ING, exacerbated by uncertainty over the potential scale of tariffs. That has also fed into investors getting less attractive prices than they expected when they trade, Prince added, due to the rapid market moves.<\/p>\n Some investors, meanwhile, are looking for currency pairs less exposed to tariff news.\u00a0\u201cI think we have learnt to have most of our risk in trades which are not hostage to headlines,\u201d said Mark Dowding, chief investment officer for fixed income at RBC Bluebay Asset Management, which is betting on the yen against the euro.<\/p>\n Fixed income managers are trying to work out whether tariffs mean higher inflation and interest rates, or weaker economic growth, which could lead to more rate cuts.<\/p>\n The immediate reaction on Monday was to price in more inflation and slower interest rate cuts in the US, with two-year Treasury yields rising above 4.28 per cent, although they have since fallen back.<\/p>\n At the same time, investors bet on lower growth and faster interest rate cuts in countries such as Canada and the UK. <\/p>\n \u201cYou do have countervailing influences,\u201d said Mark Cabana, head of US rates strategy at Bank of America. \u201cThe way the rates market has initially traded that is to expect the Fed [to keep rates] on hold for longer, due to inflation risks, but then assign some increased probability of growth negative impacts\u201d in future.<\/p>\n For Cabana, it makes sense to buy Treasury inflation protected securities. \u201cThey implicitly give you a hedge to inflation and they also help you guard against some of the downside growth risks.\u201d <\/p>\n In emerging market debt, meanwhile, fund managers have been using sell-offs in some countries\u2019 sovereign debt caused by tariff news as a buying opportunity.<\/p>\n Such news \u201creally results in healthy moves in asset pricing, where we can take the opportunity to get involved in names that, in our assessment, are strong fundamentally or mispriced\u201d, said Alaa Bushehri, head of emerging markets debt at BNP Paribas Asset Management, which has recently bought Mexican debt on negative tariff headlines.<\/p>\n Another fund manager, who asked not to be named, said they took advantage of the recent brief US tariff threats<\/a> against Colombia to buy its debt at a lower price.<\/p>\n Some investors are turning to other assets as they search for havens. Gold this week hit a fresh record high of $2,882 per troy ounce. \u201cIn the commodity world, the only trade you can really go to right now is gold,\u201d said Panmure Liberum analyst Tom Price.<\/p>\n But bitcoin, billed by some as \u201cdigital gold\u201d, has offered less protection and is down this week<\/a>, despite investors\u2019 early expectations that Trump would prove supportive to the sector.<\/p>\n Beyond the short-term trades, fund managers are nervous about longer-term bets on a major downtrend in risky assets that might never happen, particularly given how strongly markets have performed in recent years.<\/p>\n Investors \u201cjust don\u2019t know enough about Trump\u2019s next move and how the Fed will react\u201d, said Andrew Pease, chief investment strategist at Russell Investments. <\/p>\n \u201cGoing underweight risk assets is a big call, and you need to be very confident. It\u2019s hard to get back to neutral if the market doesn\u2019t correct.\u201d<\/p>\n![\"Line](\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F8f1f05b0-e3b7-11ef-86d4-e937648d5812-standard.png?source=next-article&fit=scale-down&quality=highest&width=700&dpr=1\")
<\/picture><\/figure>\nCurrencies: \u2018incredibly difficult\u2019<\/h3>\n
![\"Line](\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F7b43e7f0-e44c-11ef-afb3-3fb0a889dd47-standard.png?source=next-article&fit=scale-down&quality=highest&width=700&dpr=1\")
<\/picture><\/figure>\nBonds: \u2018countervailing influences\u2019<\/h3>\n
Risk-on or risk-off?<\/h3>\n