Another sea of red as tariffs trump ceasefire hopes

By Jamie McGeever

ORLANDO, Florida (Reuters) – TRADING DAY

Making sense of the forces driving global markets

Wall Street’s failure to bounce back from its recent beating on news of a potential ceasefire between Ukraine and Russia shows just how worried investors are about the growth and market impact from U.S. President Donald Trump’s tariff wars.

Ukraine said on Tuesday it is willing to accept a U.S. proposal for a 30-day ceasefire, a deal that Washington will now put to Moscow.

Investors initially cheered the news, and at one point the Nasdaq was up more than 1%. But Trump’s announcement that he will double tariffs on imported steel and aluminum products from Canada to 50% weighed heavily, and traders ended the day with a sea of red across their screens.

Today’s Key Market Moves.

* The three main indexes on Wall Street close at freshfive-month lows. The S&P 500 is back in ‘correction’ territory,down more than 10% from its peak, and the Nasdaq is off 15% fromits peak. * The dollar slides to a 5-month low against a basket ofmajor currencies, failing to draw any support from the reboundin Treasury yields. * The biggest driver of that move is the euro, which smashedthrough $1.09 for the first time since October. $1.10 is nowwell within view. * Bitcoin hits a fresh four-month low but ends the day 5%higher, snapping a five-day losing streak, as general riskappetite recovers in U.S. afternoon trading. * Britain pays a record-high yield on inflation-linked bondssold via syndication. While U.S. borrowing costs may be easing,they’re rising in many parts of the developed world, especiallyEurope.

The prospect of a Russia-Ukraine ceasefire is a ray of hope for investors, but not enough to lift the darkening economic clouds that are gathering. The brewing global trade war is creating record levels of uncertainty, by some measures, and businesses and consumers alike remain extremely nervous.

Despite the market turmoil and alarming level of uncertainty his tariff agenda has created, Trump is showing no sign of backing down, and on Tuesday he cranked the trade war up a gear.

Around $5 trillion has been wiped off the value of U.S. stocks since the S&P 500 peaked a month ago, the dollar is sliding, and volatility and corporate bond spreads are breaking higher to levels not seen in months.

Trump dismisses this as part of the necessary “transition” to a new, rebalanced U.S. economy. But it’s taking its toll in financial market pricing, as well spending, investment and sentiment across the country.

One consequence of the tariffs chaos is the quandary it could put the Federal Reserve in. Rate cut expectations are picking up again due to the deteriorating growth outlook and possible recession fears. But economists are also raising their inflation forecasts, and a hotter-than-expected CPI report on Wednesday would be particularly unwelcome for policymakers.

While implied volatility in U.S. Treasuries is rising, there is no sign yet of any market dysfunction. But in such a tense environment, the recent steep decline in open interest in the Treasury futures market will be worth keeping an eye on.

Exposure to Treasury futures plunges at risky moment

Levels of open interest in the U.S. Treasuries futures market rarely garner much attention, but this might be one of those occasions, as President Donald Trump’s tariff agenda threatens to slam the brakes on the U.S. economy, perhaps even putting it into reverse gear.

Commodity Futures Trading Commission figures show that open interest, the broadest measure of investors’ exposure to U.S. bond futures, is sliding at a historic pace. In some cases, such as two-year contracts, the fall is the sharpest on record.

In the week through March 4, open interest in two-year futures fell by a record 396,525 contracts, or nearly $80 billion. That’s around 10% of investors’ total exposure, and it means overall open interest is down 17% from its peak around the U.S. presidential election in November.

Open interest in the 10-year space fell by 503,744 contracts, or $50 billion, the third biggest weekly fall on record and again around 10% of total exposure.

The value of open interest across two-, five- and 10-year contracts fell by $179 billion in the week to $1.858 trillion, the lowest since June last year. More significantly, this marked a notable 9% decline in a single week.

Why does this matter? As a paper by Federal Reserve staffers Andrew Meldrum and Oleg Sokolinskiy found last month, cash market depth “significantly affects liquidity fragility in all maturity sectors” of the Treasury market. In other words, the slump in open interest could mean that one of the world’s most important markets has become easier to disrupt.

‘POINT OF CONCERN’

Some of this activity is seasonal, as…