Trade war and geopolitical tensions ease but relief remains elusive

Global trade tensions kept markets on edge Tuesday, with stocks swinging violently before ultimately closing in the red—despite flickers of optimism in U.S.-Canada trade talks.

Trump’s double-down tariff grenade on Canadian aluminum and steel sparked a brutal open, reigniting recession jitters and sending traders scrambling. But after reports surfaced that Ontario would scrap an electricity surcharge on U.S. exports—and with Trump teasing a potential rollback on the tariffs—stocks managed to claw back some of their losses. Not enough, though, to flip the tape green.

Not even the prospect of a Ukraine-Russia ceasefire could fully right the ship, underscoring how spooked investors are over the economic fallout from Trump’s escalating tariff wars.

Ukraine signalled Tuesday that it’s open to a U.S.-brokered 30-day ceasefire, with Washington now set to pitch the proposal to Moscow. Markets initially cheered the de-escalation, but whatever goodwill rally sparked was swiftly steamrolled by the thought of more tariff angst.

The result? Another ugly session, with traders staring at a sea of red across their screens by the closing bell. Geopolitical optimism? Fleeting. Tariff trauma? Here to stay.

By the close, the Dow Jones Industrial Average cratered 1.1% (-478 points) to 41,433, while the S&P 500 shed 0.8%, and the Nasdaq Composite dipped 0.2%. All three indices locked in their worst two-day drop since August, as traders digested the economic fallout of White House policy chaos.

The tariff-fueled whipsaw followed Monday’s selloff bloodbath, where fears of global tariffs, deep government spending cuts and the White Hous administration's deliberate slowdown strategy sent stocks plunging. Tech stocks—the former darlings of the market—took the brunt of the damage, dragging the Nasdaq to its sharpest one-day drop since 2022.

With volatility ripping through markets and economic uncertainty ratcheting higher, investors are bracing for more turbulence ahead. If tariffs keep escalating and the White House doubles down on its fiscal tightening, the risk of a full-blown market exodus is growing daily.

The real nightmare scenario? What we’re seeing now might be little more than fire drills before the biggest dumpster fire in years scorches the markets. If U.S. jobs data takes a swan dive, it could send the Fed funds curve into a full-blown tailspin—not in a controlled, calculated shift, but in sheer panic mode.

A rapid repricing of rate expectations could trigger a cascading risk-off event, with stocks, credit spreads, and the dollar all scrambling for footing. The Fed wants to ease on its own terms, but if the data forces its hand, we could be looking at market chaos as traders rush to price in emergency-style cuts.

At this point, every weak payroll print or surge in jobless claims raises the stakes. The difference between a controlled slowdown and a full-on recession spiral is hanging by a thread—and the market knows it.

All eyes are on this week’s February U.S. CPI print. With job growth still at a reasonable level and wage pressures refusing to ease, the risks skew toward another sticky inflation surprise. Core inflation will likely stay well above the Fed’s 2% target, keeping policymakers stuck between a rock and a hard place.

To complicate matters further, incoming U.S. tariffs could add another layer of inflationary pressure, depending on their scope and timing. The big concern is that if inflation remains stubbornly high, the Fed won’t cut rates as aggressively as markets have priced in, potentially hammering stocks again as stagflation fears take center stage.

With all this uncertainty, equities could be entering yet another minefield today, and any upside CPI surprise might be the spark that ignites another leg lower.

Bond markets

It’s not just about where yields are—it’s about how they got there. Right now, U.S. Treasuries are caught in a high-stakes chess match, with tariffs and government spending cuts throwing a wrench into the usual rate path. Risk-off flows have forced yields lower, but here’s the catch: tariffs aren’t just a growth suppressant—they’re also an inflation accelerant. And that’s where things start to get murky.

At current levels, Treasuries are having an identity crisis. One minute they’re a safe haven as Washington manufactures a mini-recession to force the Fed’s hand, the next they’re caught in the crossfire of tariff-induced cost pressures. April 2 looms large, with the next round of trade war salvos set to land, intensifying the market’s bipolar relationship with risk assets. This isn’t just about U.S. growth anymore—it’s a global realignment. Yields should be lower, but the market isn’t quite sure if it should price in a hard landing or a stagflation grind.

Here’s the kicker: beyond the knee-jerk risk-off move, Treasuries are setting up for a potential negative kickback. The longer yields stay compressed, the more they erode real returns on fixed-rate coupons, and the wider 10-year swap spreads grow—a sign that Treasuries are losing their premium against the risk-free rate. That’s a red flag. Meanwhile, the dollar isn’t looking quite as bulletproof anymore, with basis discounts creeping in against the euro as capital flows seek more clarity overseas.

For now, the path of least resistance is for 10-year yields is lower as markets lean into defensive positioning and front-run the Fed’s eventual move. But be warned: this can flip on a dime. The moment rate cut expectations get fully priced in, risk sentiment stabilizes—or if inflation refuses to cool—Treasuries could whipsaw violently. Safe haven? Sure, for now. But when the turn comes, it’ll be ruthless.

Forex markets

The dollar remains tethered to U.S. stock market sentiment, which, let’s face it, is still the ultimate barometer of U.S. exceptionalism. And while FX traders have loved the EUR/USD high-wire act, they’re also hunting for a bottom-in-risk sentiment that could stabilize falling yields and provide a near-term floor for the greenback.

The view

Scott Bessent and Trump’s economic team are taking a chainsaw to government spending, engineering a slowdown not by choice but necessity—because the Fed failed to finish the job on inflation. Powell’s Fed stayed too dovish for too long, letting asset bubbles inflate while real wages got squeezed. Why they were cutting rates before the election was anyone's guess. With higher rates alone proving insufficient, the White House has been forced to step in and do the job the Fed wouldn’t.

The biggest blunder? The Fed’s half-baked QT, where they merely let bonds roll off instead of actively selling assets to tighten financial conditions. That let the top 1% ride the wealth effect gravy train while the middle and lower classes struggled under the weight of sticky inflation and higher for longer interest rates.

Now, the only way out is through The White House’s spending cuts, which are ripping off the Band-Aid, forcing an asset price correction—a long-overdue detox for a market that’s been mainlining government largess for too long. And while Wall Street throws its usual tantrum, the broader playbook is taking shape. Once inflation is fully choked out, the Fed will finally have the green light to slash rates aggressively, easing deficits and paving the way for private-sector-driven growth. The pain is real, but so is the reset.

The takeaway? Don’t blame Trump’s fiscal shock therapy—blame the Fed’s failure to act decisively when it mattered most. Now, markets are paying the price, but a leaner, healthier economy will emerge on the other side. That is if things don’t spiral first.