Tumbling Stock Markets and the Return of Calm in Europe
Tumbling stock markets and rallying Treasury bonds showed signs of stabilization in Europe on Tuesday, as a degree of calm returned to markets following the dramatic moves of the previous day. On Monday, the Nasdaq experienced its largest one-day fall in over two years, sparking widespread investor concern. However, by Tuesday, Europe’s broad Stoxx 600 index was flat in early trading, while Asia Pacific ex-Japan shares, which had earlier declined by around 1.75%, were only 0.5% lower by the end of the day. U.S. share futures also saw a modest rebound, rising by approximately 0.3%. This relative stability marked a stark contrast to the panic that gripped markets on Monday, when fears of an economic slowdown intensified.
Monday’s Market Panic and the Role of Trump’s Comments
The market turmoil on Monday was largely driven by President Donald Trump’s remarks during a Fox News interview, where he referred to a “period of transition” and declined to rule out the possibility of a recession. These comments exacerbated investor concerns about the U.S. economy, leading to significant sell-offs across major indices. The S&P 500 plummeted 2.7%, marking its largest one-day drop this year, while the Nasdaq slid 4.0%, its biggest single-day percentage decline since September 2022. The sharp downturns reflected a growing sense of unease among investors, who are increasingly worried about the potential for a broader economic downturn.
The Rush to Safety: U.S. Treasury Bonds and Market Sentiment
Amid the market turmoil, investors sought refuge in U.S. Treasury bonds, which are traditionally seen as safe-haven assets during periods of economic uncertainty. The yield on the benchmark U.S. 10-year Treasury note fell by 10 basis points on Monday, its largest daily decline in nearly a month, and dropped an additional 2 basis points on Tuesday to reach 4.12%. Similarly, the yield on the 2-year Treasury note, which closely tracks interest rate expectations for the Federal Reserve, fell to a five-month low of 3.88%, down 1.5 basis points. This flight to safety underscores the cautious mood among investors, who are now pricing in 85 basis points of easing from the Fed this year, up from 75 basis points just a day earlier.
Expectations of Federal Reserve Easing and Economic Risks
Market participants are increasingly betting that weak U.S. growth will force the Federal Reserve to reverse its recent tightening measures and begin cutting interest rates again. According to Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities, traders had previously assumed that President Trump would take steps to stabilize markets if stocks began to falter. However, the administration’s recent actions suggest a more aggressive approach to addressing inflation, with tariffs and even a potential recession being viewed as necessary measures to achieve disinflation. “Markets have now gotten the memo that the administration is intent on ripping the Band-Aid off,” Newnaha remarked. “For now, it’s a controlled demolition.”
Inflation Concerns and the Upcoming CPI Report
While expectations of Fed easing have grown, Wednesday’s U.S. consumer price index (CPI) report could potentially upend these projections. Investors remain on high alert after January’s hotter-than-expected inflation data, which showed a 0.5% monthly increase—the largest gain since August 2023. February’s CPI is expected to have risen by 0.3%, according to a Reuters poll. Portfolio manager Idanna Appio of First Eagle Investment Management noted that near-term inflation pressures remain sticky, driven by factors such as tariffs and shifts in immigration policies. If the CPI report confirms that inflation is still running hot, it could deter the Fed from cutting rates as aggressively as markets currently anticipate.
Currency Markets and Commodities: Safe Havens and Energy Demand
In currency markets, safe-haven assets continued to be in demand, though the moves were less dramatic than those seen on Monday. The Japanese yen reached its strongest level against the dollar in five months before retracing some of its gains to trade flat at 147.2. The euro also strengthened, rising 0.6% to $1.10898. In the commodities space, oil prices remained steady as investors grappled with conflicting factors: concerns that U.S. tariffs could slow global economic growth and reduce energy demand, versus OPEC+’s decision to increase production. Meanwhile, gold prices surged to $2,908 per ounce, nearing the record high set last month. Gold has already risen 10% in 2025, building on its 27% gain in 2024, as investors seek out alternatives to risky assets amid mounting economic uncertainty.
