Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Market sentiment soured rapidly on Thursday, sparking a steep selloff in U.S. stocks, precious metals, commodities and cryptocurrencies, as investors flocked for the relative safety of Treasuries, the dollar and Swiss franc.  

In my column today, I ask the simple question: what will it take for the Fed to raise rates? Officials and market pricing are still leaning towards further easing, but the case for the next move being a hike is just as strong. Maybe stronger.

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* Fragile and volatile

Selling begot selling on Thursday, leading to sharp falls on Wall Street and a renewed wave of liquidation in assets that had been pumped up by frenzied speculation in recent months like gold, silver and bitcoin. 

Worries over AI's impact on software companies surfaced anew, but there was no clear trigger. This is significant, as it shows how fragile sentiment is, and how stretched positioning still is in certain markets. Perhaps one reassuring element of the shake-out is Treasuries and other government bonds fulfilled their traditional role as the safe-haven of choice.

* Going long the long bond

Thursday's $25 billion auction of 30-year U.S. bonds was historic. Bid-to-cover of 2.66 was the highest since January 2018, the 4.75% high yield was 2 bps below the prevailing rate at time of issue, and primary dealers' take of 5.9% was the lowest since at least 2008, according to Exante Data.

Little wonder the 30-year yield tumbled 9 bps, its biggest daily drop since October. Does this suggest dealers expect a soft CPI print on Friday? Or fear wider 'risk off' market turbulence? Maybe. What it does show is there's life in the long bond yet. 

* US-China tensions thaw ahead of summit

Presidents Donald Trump and Xi Jinping are expected to meet in Beijing in early April, and if current signals are accurate, it will be a cordial summit which could thaw tensions between the two superpowers and ease global trade pressures.

Washington has shelved a number of key tech security measures aimed at Beijing, the yuan is trading at three-year highs against the dollar, and reports suggest the two leaders may extend a trade truce for as long as a year. As U.S. Treasury Secretary Scott Bessent said this week, US-China relations are "in a very comfortable place."

What would need to happen for the Federal Reserve to raise U.S. interest rates? If economic factors were the sole consideration, the answer would likely be "not much at all". 

So the fact that the current market debate surrounds the number of expected rate cuts this year should give pause to investors and policymakers alike. 

The economic case for raising rates is every bit as strong right now as the case for putting cuts on hold and maintaining an easing bias. Maybe stronger. But then there's the politics.