Traders Expecting High Liquidity

Risk markets are riding a wave of recovery, fuelled by a blend of political relief, monetary policy optimism, and signs of economic resilience. The latest trigger came late last week, when a potential U.S. government shutdown was averted, sending a signal of confidence through investors and capping an unpredictable month with a bullish turn.

Senate Minority Leader Chuck Schumer recently threw his support behind a House bill to keep the government funded. This averted a potential crisis, sparking a rally, with the S&P 500 jumping nearly two percent over the past five trading days. The resolution of this political risk provided a breath of air for risk assets, which had been battered by uncertainty over trade policy and economic growth. As covered earlier, Trump may want to sink the stock market for several reasons.

Adding to the momentum, the Federal Reserve’s March 19 decision to hold interest rates steady at 4.25%-4.5% while projecting two quarter-point cuts for 2025 has strengthened market sentiment. Although it was 99% expected, the chance of a potential hike, or talk of one, was also completely averted. The Fed also slowed its balance sheet reduction, which is typically a good sign for liquidity. This slightly dovish stance reassured investors that borrowing costs will ease sooner rather than later, making riskier investments like equities more attractive compared to safe havens like Treasuries.

Economic data is also underpinning the rally. The Conference Board’s Leading Economic Index fell just 0.3% in February, a softer drop than feared. Weekly jobless claims came in at 223,000, which was below the expectation (which is obviously a good thing). With unemployment near 4% and wage growth outpacing inflation, analysts see enough strength in the U.S. economy to stave off recession fears. It's important to note that the U.S. already did technically have a recession during the last administration, but the definition of recession was simply changed due to political pressure. Politics aside, analysts waiting for a drawdown as if there hasn't been one since 2020 might need to have another look at their charts.

The tech sector is continuing to perform. Anticipation is building ahead of Nvidia’s earnings report next week and investors are still betting that AI will push growth stocks higher. The Nasdaq (primarily tech) has also outperformed broader indices, reinforcing the idea that the AI narrative remains influential.

Even the ongoing tariff saga under President Trump—marked by duties being imposed, suspended, and reimposed on Canada, Mexico, and China this month—has lost some of its impact. Investors appear to be looking past the noise, focusing instead on the potential for tax cuts and deregulation to juice economic activity. What was once a source of volatility is now being shrugged off as markets adapt to the administration’s unpredictable trade playbook. This is the same thing that happened during Trump's last presidency in which he used Twitter to cause wild ups and downs in the oil and stock markets of the world. His announcements initially caused drastic trading volatility, but they eventually lost their edge.

Risks do remain. There are still wildly elevated valuations, geopolitical tensions, and a 23%-31% recession probability flagged by major banks. For now, the combination of a shutdown dodged, a supportive Fed, and a sturdy economy has risk markets recovering.