Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street slumped on Tuesday on concerns that tech companies could face steeper competition and lower margins as a result of AI, while precious metals rebounded sharply on renewed U.S.-Iran tensions. 

More on that below. In my column today I look at how President Truimp is shifting his interest rate focus to getting long-term yields down. The trouble is, the Fed has little control over that, no matter what it does with the policy rate. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* (Big) swings and roundabouts

The wild price ride across a range of markets continued apace on Tuesday. Precious metals rebounded from Friday's historic losses with historic gains, as did South Korean equities, while India's rupee had its best day in six years.

It's a testing time for investors, and not just traders with a typically short-term horizon. Price moves and volatility on this scale can cause serious portfolio damage. And compounding the difficulty is finding a reliable hedge - traditional safe harbors like Treasuries, the dollar and gold are not without risk either.

* RBA canary in the coal mine?

The Reserve Bank of Australia isn't the first G10 central bank to reverse course and raise interest rates. It follows the Bank of Japan, which is grappling with its own unique set of economic, political, FX and bond market issues. 

But the RBA's move is potentially significant. It raised rates because inflation is drifting further above the bank's 2-3% target range. Could the U.S. Fed soon be forced to do likewise later this year? After all, inflation has been above target for 5 years and is showing little sign of cooling.

* U.S.-Iran tensions fire up again

Just as it seemed like U.S.-Iran relations might be thawing, investors on Tuesday were grappling with news that the U.S. military shot down an Iranian drone in the Arabian Sea, and armed boats approached a U.S.-flagged vessel in the Strait of Hormuz.

Nuclear talks between the US and Iran are scheduled for Friday, but developments today suggest they will be fraught. Indeed, they might not take place at all, with Iran demanding that the venue and scope of negotiations be changed. Some level of geopolitical risk premium should still be in market pricing.

U.S. President Donald Trump has been on a crusade to get the Federal Reserve to lower its policy rate, but his focus now seems to be shifting to long-term borrowing costs. Fed Chair nominee Kevin Warsh will struggle to deliver on that front.

This is bad news for the millions of borrowers facing high mortgage rates and, of course, Trump himself, whose fate in November's midterm elections could hinge on the "affordability crisis" facing voters across the country.

In truth, the Fed only really has control over the short-term Fed funds rate. This is the base for longer-term business, credit card, auto, and mortgage loans, but the interest rate on these loans is primarily determined by the benchmark 10-year Treasury yield, over which the Fed has little control.