By Canan Sevgili, Alessandro Parodi and Vera Dvorakova
May 21 (Reuters) - A wave of retail-driven trading dynamics is reshaping how markets respond to U.S. President Donald Trump's second term and his war in Iran, turning political volatility into a set of widely recognised and traded patterns.
Acronyms like "TACO" - "Trump always chickens out" - "FAFO" - "f*** around, find out" and "FOMO" - "fear of missing out" - have emerged and increasingly reflect the behaviour of retail investors, who are reacting
to an incessant news flow to lean into short-term swings.
"Bull and bear are still the foundation, but 'TACO' and 'FAFO' are becoming part of the everyday language on trading desks," said Lale Akoner, global market strategist at eToro.
TACO TRADE: BUY THE DIP
In April 2025, Trump shocked global markets by announcing sweeping import tariffs on most international partners, sending global equity and debt markets into the red.
As Trump hit pause and began negotiating with Beijing and other capitals, some investors started to bet tariff fears were overblown and that the president would walk back or "chicken out" to avoid deeper economic fallout.
Subsequent pullbacks in military operations in Venezuela and Iran, with rapid U-turns after the threat of maximum force, have pushed this dynamic to new extremes.
Investors are increasingly testing how much market stress the administration is willing to tolerate.
Deutsche Bank's "pressure index" — which combines short-term changes in approval ratings, inflation expectations, equities and bond yields — suggests market stress climbed in March to its highest since the start of Trump's second term.
Despite fears of a prolonged conflict in Iran, analysts say the baseline scenario still points to a gradual de-escalation, even as investors continue to test policymakers' tolerance for volatility.
FAFO TRADE: SHOCK FIRST, ASK LATER
Another pattern gaining traction among retail investors is the so‑called "FAFO" trade, reflecting a growing willingness to absorb short‑term pain in anticipation of policy reversals.
Traders tend to react aggressively to geopolitical shocks or policy escalations, selling risk assets and pushing yields higher, before repositioning for stabilisation once market stress reaches a perceived political threshold.
During volatility tied to U.S. actions in Iran, the 30‑year Treasury yield jumped sharply in early phases, signalling heavy selling of long‑duration bonds amid inflation and fiscal concerns.
As tensions eased, yields partially retraced before rising again in recent days to new highs amid a global sell-off in longer-dated bonds, driven by concerns over the inflationary impact of prolonged disruption.
Investors increasingly see the long bond as a "pain threshold", where sharp spikes in yields can pressure policymakers to moderate their stance.
In sustained geopolitical shocks, especially those feeding into inflation and growth risks, markets may shift from quick reversals to deeper, longer‑lasting repricing, limiting the effectiveness of FAFO‑style trading.
FOMO TRADE: GOLD RUSH OR OIL BOOM?
Through 2025, retail investors piled into gold as a safe asset in uncertain times. The price rose 66% last year - its steepest climb since 1979 - propelled by a perfect storm of falling rates, geopolitical flashpoints, robust central bank purchases and flows into bullion-backed products.
However, after reaching a record high of almost $5,600 an ounce in January, gold has retreated to around $4,500 in the aftermath of Trump's capture of then Venezuelan President Nicolas Maduro and the start of the Iran war as investors shifted instead to oil.
Trump has also brought oil to the fore. The price has nearly doubled since January and with the Iran war effectively shuttering the critical Strait of Hormuz, Brent crude futures hit $126 a barrel on May 1.
This divergence between oil and gold highlights a shift in investor behaviour, with markets favouring energy exposure over traditional defensive assets.
While a series of directional bets on the oil price made shortly before major announcements on the Iran war and worth hundreds of millions of dollars raised concern among market regulators, many retail investors are guessing which way the pendulum will swing next.
"Another one that could be gaining popularity is 'NACHO' ("Not A Chance Hormuz Opens")", said Piotr Matys, senior FX analyst at In Touch Capital Markets.
CROSS-ASSET WHIPLASH
Cross-asset whiplash refers to sharp and sometimes conflicting moves across markets as investors respond to shifting headlines. Trading has been uneven across asset classes, with commodities such as oil driven more by specific supply and demand factors, while traditional correlations across other assets have become less consistent.
The whiplash lies in how quickly positioning flips. Safe-haven demand can surge on tariff threats or Middle East risks, only to fade as equity markets stabilise. But while oil and gold can hedge part of the risk, higher oil prices may start to feed into inflation, potentially pushing yields higher, Akoner said.
"That's when you start to see broader cross-asset stress," she added.
(Reporting by Canan Sevgili, Alessandro Parodi and Vera Dvorakova in Gdansk, editing by Amanda Cooper and Sharon Singleton)
