From Euro to Em: Russia’s Ukraine War Upends Market Bets

By Saikat Chatterjee and Dhara Ranasinghe

LONDON (Reuters) – Russia’s invasion of Ukraine has upended several popular trades, inflicting heavy losses on investors bullish on European stocks and the euro and also those bearish on the Japanese yen and government debt.

The view before the aggression was that global economic recovery was chugging along, company earnings were robust and central banks, facing rising inflation, were on course to raise interest rates several times this year.

But while the spiking geopolitical tensions continue to fan inflationary pressures via the oil channel, they are undermining some of the biggest consensus trades in markets.

“We just experienced a major pain point: the Russian invasion. That was enough to flush out the more aggressive short term positions” ” said Aaron Hurd, senior portfolio manager, currency, at State Street Global Advisors in Boston.

Some of the more entrenched bets will come under further pressure if the conflict threatens the broader growth outlook, Hurd predicted.

Below are five charts showing the main consensus positions in global markets:

1/SHORT YEN, LONG EUROS

The premise that the Bank of Japan would lag global counterparts in tightening policy had made the Japanese yen every currency trader’s preferred short — hedge funds’ net short bets on the yen were just below three-year highs, according to data from Commodity Futures Trading Commission.

The yen’s rise to a three-week high on Thursday would have dealt a blow to those positions.

Another large consensus trade has been long euros where net longs are at six-month highs and rose by $1.2 billion in the latest week, according to CFTC.

Derivative markets show traders were frantically buying puts this week, an option to protect against losses, as the single currency fell below $1.11, its lowest levels since July 2020.

Meanwhile the growing trend to bet against the dollar — long dollar positions slipped to the lowest since August – also backfired, as the dollar index jumped to a mid-2020 high.