Dust settling but Insto investors underweight $US

Reflecting the broader impacts of the US President, Donald Trump’s tariffs approach, new analysis from State Street has revealed that US dollar selling represented the mainstay of institutional flows last month.

Just as importantly, it showed that institutional investors were underweight the US dollar for the first time in three years.

The latest State Street Institutional Investor Indicators revealed that the State Street Risk Appetite Index improved slightly to sit completely balanced by the end of April, noting that investors had “weathered significant tariff-related volatility in their stance towards risk assets.

The analysis suggested that while Trump’s ‘Liberation Day’ tariffs approach had generated a violent reaction, the dust had settled towards the end of the month.

State Street Markets head of EMEA Macro-Strategy, Timothy Graf said that despite significant intra-month volatility, broad measures of risk appetite were balanced across institutional portfolios.

“In price terms, equity markets took a complete round trip, bookended by the violent reaction to the 2 April Liberation Day tariffs at the start of the month, and a subsequent recovery on the prospect of negotiated trade deals and hopes that the worst effects of trade restrictions would be watered down,” he said.

“Within the month, the weight to equities, the riskiest class of assets, continued to retreat towards long-run norms and a search for safety is still present in currency flows. However, despite worries over stagflation brought on by the shock of tariffs, cash balances declined by an even greater amount and longer-dated fixed income assets saw their largest monthly rise in portfolio weight in two and a half years.”

“USD selling remains a mainstay of institutional flows and USD positioning now shows the first underweight for three years,” Graf said in his analysis.

“Foreign investors are still modest sellers of US Treasuries, but cross-border equity flows into the US are in the top decile of the last five years. After a surge in interest in Q1, flows into European equities are starting to moderate, but the demand for EUR as a currency alternative to the USD is still relatively strong.”

“As we write, Asian currencies are rallying strongly as part of a broader hedging out of dollars, with cross-border equity flows into the region turning from negative to positive over the last two weeks. Fears around trade protectionism are ever-present, but seem to have abated in emerging Asia, at least for now.”