Morning Bid: 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 funds are rolling their positions into new benchmark contracts. And some is related to the so-called basis trade, the arbitrage play used by hedge funds to exploit the tiny price difference between cash bonds and futures.

    So far, so normal, in which case open interest should pick up again in the coming weeks as investors of all stripes - particularly asset managers on the 'long' side and hedge funds on the 'short' side - rebuild their exposures.

    But the sharp moves are coming at a time of heightened volatility and uncertainty across all markets. Wall Street and U.S. Big Tech have borne much of the brunt, with around $5 trillion wiped off the value of U.S. stocks in the last three weeks. But volatility is on the rise everywhere.

    Treasury yields have tumbled around 60 basis points in the last month, and implied volatility as measured by the MOVE index this week rose to its highest in four months.

    True, there has been no sign of market dysfunction despite the big price moves, but room for complacency is shrinking.

    "Uncertainty could keep some investors away," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. "If open interest doesn't come back it could be a sign that risk managers are deleveraging. Right now it's something to watch closely rather than a point of concern."

    RECORD FALLS

    Much of the decline in recent months is down to leveraged funds reducing their 'short' positions more aggressively than asset managers scaling back their corresponding 'long' positions, suggesting speculators are deleveraging.

    The value of leveraged funds' aggregate short position across two-, five- and 10-year contracts is now $970 billion. That's down by almost a fifth from the record high of $1.186 trillion in November last year.

    This is probably not a bad thing and will likely please regulators who had warned that a disorderly unwind of funds' basis trades could pose major financial stability risks. That hasn't played out.

    But further reduced open interest from here at a time of rising volatility might put liquidity, prices and investors' ability to trade under greater strain.

    As Meldrum and Sokolinskiy note, "Times of low market depth are associated with an increased probability of low liquidity states in the future."

    And at this delicate juncture, anything that impacts liquidity in the world's most important market is certainly worth monitoring.

What could move markets tomorrow?

* Japan wholesale inflation (February) * India CPI inflation (February) * U.S. 10-year Treasury note auction * Bank of Canada interest rate decision * U.S. CPI inflation (February)

If you have more time to read today, here are a few articles I recommend to help you make sense of what happened in markets today.

1. The dawn of euro defence bonds? 2. Trump's tariffs create the 'Wild West' on Wisconsin'sfactory floors 3. If Europe builds the gigafactories, will an AI industrycome? 4. US retail investors wary of buying the dip as Trumpanxiety deepens 5. Macro hedge funds are outperforming so far in 2025

I'd love to hear from you, so please reach out to me with comments at . You can also follow me at [@ReutersJamie and @reutersjamie.bsky.social.]

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here.

(By Jamie McGeever; Editing by Bill Berkrot)