(Feb 7): The early days of Donald Trump’s trade war have been marked by a flurry of advances and retreats, forcing traders to adapt by increasingly making bets that are more conservative than usual or easily reversed. 

“The market is trying to predict and trade off a very unpredictable situation and person,” said Antony Foster, the London-based head of Group-of-10 spot trading at Nomura International Plc, who has taken to running smaller positions on currencies. “You could look like a hero one minute, only for the situation to turn on a sixpence and you look like a zero the next.” 

As well as having to trade more nimbly or less boldly, investors are embracing more complex trading strategies to protect themselves against the conflicting headlines. They are having to be agile across multiple assets from the Mexican peso to Chinese stocks as Trump-driven spikes in volatility are evident worldwide. 

Trading volumes in the US$300 billion-plus (RM1.32 trillion-plus) foreign-exchange options market have skyrocketed to multi-year highs as investors pile on protection. A measure of 10-day realised volatility on a gauge of Asian stocks jumped to the highest level since October. And the outlook for Treasuries has become more complicated as brinkmanship around tariffs muddies the outlook for Federal Reserve policy. 

“The path of markets that would take weeks is being compressed into days — even a day,” said Calvin Yeoh, portfolio manager at hedge fund Blue Edge Advisors Pte Ltd. “Increasingly violent intra-day swings will force traders to consider the lookback in which they measure volatility,” he said, referring to a method to gauge swings in the market. He added that he’s speeding up entry and exits on trades. 

It’s become trickier even for speculative funds, which are typically used to adjusting their positions to keep up with every twist and turn in the market. For George Boubouras, a three-decade market veteran, it’s gotten increasingly hard to find bets that can stick.

“The positions are getting very short dated, less than 24 hours when in some cases before, days or a week were the norm,” said the head of research at K2 Asset Management in Melbourne, referring to bonds and stocks. “Whether it’s on currencies on credit, you have to adapt.”  

Recent moves in the Canadian dollar are a case in point.

Volumes on loonie option trades on the CME Group reached their second-highest ever level on Jan 31 as investors looked to hedge their risks before weekend announcements on trade policy shifts, said Chris Povey, London-based head of FX options. The currency fell to the lowest since 2003 on Monday, after Trump imposed 25% duties on Canada, only to rebound as the tariffs were delayed.

In Singapore, multi-strategy hedge fund GAO Capital has gone from shorting volatility to buying it as market swings pick up and betting on direction becomes harder by the day. The fund is “staying nimble with trading guided by market flows,” said Chauwei Yak, chief executive officer. “So being reactive rather than directional,” she said.  

It’s the same in equity markets. 

US traders are turning to complex hedging strategies to manage heightened volatility as Trump’s tariffs fan fears of a surge in inflation. The trouble for some is that options — a favoured instrument to manage market risks — are becoming more expensive as levies, jitters around Chinese AI technology and peak earnings season coincide. 

“It’s generally a difficult tape and it’s just harder right now to have conviction,” said Ling Zhou, head of equity derivatives strategy at TD Securities. One trade that stands out is investors on betting China, he said, with the idea that “the bad” is already priced in, Trump can walk back some of his commentary and Beijing may roll out further stimulus. 

Option volumes for popular China-focused exchange-traded funds like the KraneShares CSI China Internet Fund and the iShares China Large-Cap ETF have increased significantly in the past month, according to data compiled by Bloomberg.

After the US election, hedge funds added risk by increasing gross exposure, adding both long and short positions, said Charlie McElligott, managing director at Nomura Securities International. But because they had so much risk on their books, they needed a hedge. 

They bought this protection mainly through options, McElligott explained, like paying extra for out-of-the-money puts protecting against bigger market drops.

George Molina, head of trading for Templeton Global Investments, is also adjusting to bigger market swings. 

“As volatility spiked this week, we have become more opportunistic at strike prices,” he said, referring to the fixed price at which the owner of a derivative like an option can buy or sell the underlying security. He is also prolonging exposure to the market “across the full day to capture more news bytes across time zones.” 

Bond traders are similarly on guard as Trump’s policies revive debate on whether inflation would make a proper comeback in the US and undercut the case for monetary easing. Others are even contemplating the risk of a hike, adding to the uncertainty.

“Inflation is the kryptonite of bond investors,” said George Catrambone, head of fixed income at DWS Americas. “If you’re trying to trade this market, you actually have to be really, really fast because the episodes have been really shortening in time.” 

Traders unwound Treasuries futures positions across shorter maturities on Monday by the most since November as Trump’s levies spooked markets. Positions in two-year contracts now amount to a little over 4.1 million, the least since June. Meanwhile, investors in cash US government bonds have pulled back sharply from the biggest net long position in almost 15 years, JPMorgan Chase & Co’s latest client survey shows.

Meanwhile, Jack McIntyre is taking a different approach. He likes “relative value trades” including emerging-market and UK debt, but prefers to be underweight core Europe and Treasuries. He’s also opting to wait out wild market swings. 

“Tariff talk might take a backseat for a few weeks  — this round was clearly ‘emergency’ led,” said the portfolio manager at Brandywine Global Investment Management. “Patience is the operative word for real money accounts, for now.”

Uploaded by Isabelle Francis