Market Is Not Well Positioned For Another Risk-Off Episode

Authored by Simon White, Bloomberg macro strategist,

Speculative positioning over the last few weeks has become net risk-on, leaving the market subject to upset if the latest geo-economic flare-up over Greenland escalates.

Today might be a year to the day since President Trump’s inauguration, but the twists and turns of his second tenure in office are still coming thick and fast.

Europe does not look like it is going to back down in the face of Trump’s tariff threats over his attempt to requisition Greenland, leaving markets subject to another risk-off episode that could equal the tariff tantrum last April, as the two largest global economies go head to head.

As far as speculators go, the timing is inconvenient.

The chart below shows the net long of speculators, as a percent of open interest, across the “risk-on” futures of AUD, NZD, BRL, MXN, CAD and Bitcoin, against the “risk-off” products of JPY, CHF, DXY, gold and the VIX.

The net long in risk-off has steadily declined to be almost flat, and the net long in risk-on has increased, such that the overall net position is back to neutral, for the first time since late 2024.

The market is even less prepared for a risk-off move from this perspective than it was when Trump launched his tariff salvo last year, with the net measure back then significantly more in favour of risk-off instruments.

Macro hedge funds and CTAs, too, have likely been adding to riskier positions through their exposure to US stocks, which we can imply from the rising sensitivity of their returns versus those of the S&P.

European stocks are down today, and so too are US equity futures.

Paul Dobson sees a way this Greenland spat ends well for risky assets:

That the initial reaction wasn’t more extreme speaks in part to the fact that markets have become so numb to political risk in recent months that volatility has been tumbling across asset classes.

It’s also true that traders have gotten used to the escalate-to-de-escalate playbook and may be expecting more of the same (and have been burned too many times by a market rebound after a knee-jerk selloff).

For the market optimists, there is also a more positive way of looking at how things could play out, especially from a US perspective.

For one thing, if Trump were to achieve at least some of his objectives, it would be another show of power and strength in a quickly polarizing world.

Markets may also warm to the possibility of a more united Europe, greater defense spending, the development of Greenland’s resources and, potentially, a swifter end to the war in Ukraine and containment of Russia.

But, if Paul's sunnier outlook is not realized, then hedge funds – along with speculators in general – could find themselves offside and reducing risk rapidly, increasing the likelihood of outsized market moves in a risk-off direction.