Trump put in play: For the past two decades we have often observed the Fed put in play after every 20% correction in equity markets. Given that inflation is still above target and has the potential to pick up again on the back of US tariffs, the Fed put was clearly missed. In their latest communiques, central bankers suggested that they are happy to see the path of global trade show up in growth and inflation data before reacting. In the absence of the Fed put, financial markets got some reprieve from the Trump put, which led to a recovery in risk assets. That said, the redefining of the global trade landscape has created a short-term approach in the market, with policy headlines still driving massive volatility. With the lack of short-term visibility, trend strategies have continued to underperform over the past month and the correction in CTA strategies has reached c.10%, similar levels to the summer of last year.

Contrarian trade: BBVA’s FX carry strategies have been the worst performing over the past month. This has mainly been driven by the fact that carry strategies tend to be short volatility in nature, and over the past month we saw macro volatility jump back to the highs of 2022. After Liberation Day the VIX jumped to highs only seen during the COVID and the Global Financial Crisis. These two instances saw a subsequent deep global recession. Although recession risks have increased in the current environment, it is still not our base case. This suggests entering strategies with short volatility characteristics could be profitable in the short term.

Risk-premia recap: We highlighted the credit trend strategy as a trade of the month in our last publication. Given the global risk-off sentiment since then, which we did not expect, all trend strategies have underperformed over the past month. We believe markets will need some clarity on US trade policy before trend strategies come back into favour. FX value strategy, particularly in LatAm, continued to deliver strong returns over the past month. The strong performance of our value strategies was highlighted in our last risk-premia publication, even though most of the positive performance was driven by a 5% move after US Liberation Day.