Geopolitical shock prompts risk reduction - Citi

Investing.com -- Citi revealed in a note on Wednesday that it is cutting risk across several macro positions after a sharp and sudden volatility event driven by geopolitical tensions.

Analyst Dirk Willer wrote that “geopolitics usually causes very sharp, but short-lived, market disruptions,” but added that current cross-asset moves “feel like a VAR shock, and this can intensify before the situation ultimately stabilises.”

Willer declared that risk management is now the priority.

According to Citi, the team “cut some part of our risk, either where trailing stops were hit or where positioning is more stretched.”

The bank has unwound its long EURUSD position, taken profit on an EM FX carry basket, exited HUF and BRL receivers, and closed its long 30-year Gilts versus OATs trade.

The note described the episode as “a proper VAR shock,” adding that while conditions may stabilise, “buying the dip just one day too early can create major losses.”

Citi is reducing exposure in areas where positioning is heavy, particularly in EM FX carry and in rates markets where expectations for imminent cuts have drawn substantial interest.

The U.S. dollar has reemerged as a risk-off hedge. Citi said the terms of trade shift following Iran-related headlines has outweighed other drivers, pushing EURUSD to levels that triggered the bank’s drawdown limits.

“We respect our drawdown limit and close our long EURUSD spot trade,” Willer wrote.

He added that while these shocks are typically short-lived, “these assets must be bought back at some stage,” once volatility subsides.

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