How markets actually work — and how to talk about them
Module 1 explained the floor and the roles. This module explains the markets those people trade. By the end you should be able to discuss rates, credit, FX, equities, and commodities with enough precision to hold a real conversation in an interview — not just recite definitions.
How markets actually work
A market is a mechanism for price discovery. Buyers and sellers with different views about the value of an asset interact until they agree on a price. That price — reached at the margin by the last buyer and seller willing to transact — becomes the market price. Everything in finance follows from this.
Bid, offer, and spread. In any market there is a price at which you can buy (the offer, or ask) and a price at which you can sell (the bid). The difference is the spread. The spread is not friction to be minimised — it is the compensation the market maker earns for providing liquidity. A tighter spread reflects a more liquid, more competitive market. A wider spread reflects illiquidity, risk, or an absence of competing dealers.
Liquidity is the ability to transact in size without moving the price significantly. The US Treasury market is the most liquid in the world — you can execute billions in seconds with minimal market impact. A small EM corporate bond might have one dealer willing to show a price, at a wide spread, for a fraction of the size you need. Understanding where a product sits on the liquidity spectrum explains almost everything about how that desk operates.
What actually moves markets. Prices change when new information arrives — or when the balance of buyers and sellers shifts. The most important drivers are:
1. Data releases — economic reports (CPI, NFP, GDP) that update the market's view of the economy and therefore of what central banks will do next.
2. Central bank policy — rate decisions, forward guidance, and balance sheet changes move every asset class simultaneously. A surprise rate hike tightens financial conditions and ripples through rates, credit, FX, and equities in minutes.
3. Positioning and flows — if most market participants are already positioned the same way, any reversal can be violent. A crowded trade unwinding generates price moves that have nothing to do with fundamental value. Experienced traders track positioning data (CFTC Commitments of Traders, prime broker surveys) as carefully as they track macro data.
4. Earnings and corporate events — relevant primarily for equities and credit, but major corporate announcements can affect FX and sector indices.
5. Geopolitical and exogenous shocks — wars, elections, supply disruptions. Least predictable and often most violent in their initial impact. Markets tend to overshoot in both directions around these events before mean-reverting.
Markets are forward-looking. By the time a piece of news is widely known, it is usually already reflected in prices. What matters is not whether something happens — it is whether it happens in line with, above, or below what the market was already expecting. A rate cut that was 90% priced in will produce almost no reaction when it actually occurs. An unexpected cut from a "hawkish" central bank will move markets sharply even if the cut is small in absolute terms. This asymmetry is one of the most important things to understand about how markets behave around events.
Volatility measures how much prices move. High volatility means wider daily ranges, wider bid-offer spreads, higher option premiums, and more difficult client conversations. The VIX (equity volatility), MOVE index (rates volatility), and equivalent FX measures are watched as real-time indicators of market stress. When volatility spikes, liquidity deteriorates: dealers widen their spreads because the risk of being caught on the wrong side is higher.
When asked "what is moving markets right now?" the answer should have two layers: the proximate cause (what happened this week) and the underlying driver (what fundamental dynamic is it expressing). "Gilts sold off because the CPI print was higher than expected" is fine. "Gilts sold off on the CPI print, but the more interesting question is whether this is a one-off or the start of a re-acceleration that forces the BoE to reverse course — and that is what is driving the 2s10s flatter this month" is what gets people's attention.
Interest rates and the yield curve
If you understand one thing well before an S&T interview, make it this. Rates are the foundation of modern finance. Every other asset class — credit, FX, equities, commodities — prices itself relative to rates in some way. The yield curve is the market's real-time summary of where rates are, where they are expected to go, and how much uncertainty there is about the future.
What a bond is. A bond is a loan. You lend money to a government or corporation today; they pay you a fixed coupon at regular intervals and return your principal at maturity. The yield is the annualised return you earn if you hold to maturity — accounting for both the coupon and any difference between the price you paid and the face value you receive back.
The inverse relationship. Bond prices and yields move in opposite directions. If a bond pays a 4% coupon and you buy it at par (100), your yield is 4%. If the price falls to 95, your yield rises — you receive the same coupon but bought it cheaply, so your total return is higher. This inverse relationship is the most important mechanical fact in fixed income.
Duration measures a bond's sensitivity to rate changes. A bond with duration of 8 years falls approximately 8% in price if yields rise by 1%. Longer-dated bonds have higher duration — they are more sensitive to rate moves. A 30-year gilt moves far more violently than a 2-year note for the same rate shock.
The yield curve plots yields on the vertical axis against maturity on the horizontal. Under normal conditions it slopes upward — investors demand more yield to lock up their money for longer (the term premium). When the curve inverts — short-term yields above long-term yields — it typically signals that markets expect rate cuts ahead, often because a slowdown is anticipated.
Normal (gold): upward-sloping, positive term premium, economy expanding. Flat (green): transition — often late cycle, central bank near peak. Inverted (red): short rates above long rates, historically a reliable recession signal.
The 2s10s spread — the difference in yield between 2-year and 10-year government bonds — is the most watched curve metric. When it widens the curve is steepening. When it narrows or goes negative the curve is flattening or inverting. Every rates conversation in an interview will touch the curve shape and what it implies.
DV01 (Dollar Value of a Basis Point) is how traders measure rate risk. If your book has a DV01 of $100,000, you make or lose $100,000 for every basis point (0.01%) move in yields. Traders think in DV01, not notional — a £1bn position in 2-year gilts carries far less rate risk than a £100m position in 30-year gilts.
The term premium is extra compensation investors demand for holding long-dated bonds rather than rolling short-term bonds. Post-GFC, QE suppressed it — central banks bought bonds aggressively and pushed down long-end yields. Since 2022, as QT has proceeded and fiscal deficits have remained large, the term premium has risen. This is why long-end yields stayed elevated even as central banks cut short rates in 2024–25 — a dynamic that confused many investors and drove significant curve volatility. Understanding the term premium distinguishes candidates who understand rates from those who have merely memorised the yield curve diagram.
Central banks
Central banks set the short-term interest rate — the overnight lending rate that anchors the entire yield curve. Every other rate in the economy — mortgage rates, corporate borrowing costs, government bond yields — is priced relative to where the policy rate is and where markets expect it to go.
The mandates. The Federal Reserve has a dual mandate: price stability and maximum employment. The Bank of England and European Central Bank have a primary mandate of price stability (2% inflation target) with secondary considerations of economic growth and financial stability. The Bank of Japan has historically pursued price stability and economic growth, and is unique for having operated near-zero or negative rates for over a decade.
The tools. The primary tool is the policy rate — the rate at which commercial banks borrow overnight. Beyond this: forward guidance (committing to a rate path to influence long-term expectations), quantitative easing (buying bonds to push down long-term yields and inject liquidity), and quantitative tightening — the reverse. Since 2022 the dominant theme across major central banks has been aggressive hiking to combat inflation. Since 2024, cautious cutting cycles have begun as inflation has normalised.
What markets care about is not just the decision — it is the trajectory. If the Fed cuts 25bps but signals fewer cuts ahead than expected, bonds sell off and yields rise even though the actual move was a cut. The FOMC dot plot — the anonymised rate projections of each committee member — is one of the most closely watched documents in global finance for exactly this reason.
"Priced in" in practice. Fed Funds futures trade continuously and allow you to see exactly what the market expects for each upcoming FOMC meeting. Before any meeting, traders have already priced in the probability of a cut, hold, or hike. A 90% priced-in cut delivering 25bps is a non-event. A 40% priced-in cut delivering 25bps moves markets sharply. The market reaction is about the surprise, not the action.
| Central bank | Chair (2026) | Primary mandate | Meeting schedule |
|---|---|---|---|
| Federal Reserve (Fed) | Jerome Powell | Price stability + maximum employment | FOMC 8×/year · dot plot quarterly |
| Bank of England (BoE) | Andrew Bailey | 2% CPI target | MPC 8×/year · Monetary Policy Report quarterly |
| European Central Bank (ECB) | Christine Lagarde | Price stability (<2% HICP) | Governing Council 8×/year · projections quarterly |
| Bank of Japan (BoJ) | Kazuo Ueda | Price stability (2% CPI) | MPM 8×/year — unusually market-moving given YCC exit |
The 2026 environment is mid-cutting-cycle but cautious. Neutral rates are higher than pre-COVID — rates are not returning to 0–0.25%. The sell-side consensus frames this as "cuts continue, but this is not a return to ZIRP." The BoJ is the outlier — the only major central bank tightening, slowly exiting decades of ultra-loose policy. Every BoJ meeting carries outsized market-moving potential relative to the small size of rate changes involved, because of the enormous USD/JPY carry trade that built up during years of near-zero Japanese rates.
Key economic indicators
Data releases are scheduled in advance — you can see exactly when they are coming. What is not known is the number. The market forms a consensus estimate before each release; the reaction is driven by the surprise relative to that consensus, not the number in isolation. A strong number when the consensus was already strong is a non-event. A strong number when consensus expected weakness moves the market hard.
| Indicator | What it measures | When | Why it moves markets |
|---|---|---|---|
| Non-Farm Payrolls (NFP) | US monthly employment change, ex-agriculture | First Friday of each month, 8:30am ET | The single most market-moving regular data release. Strong print pushes rate hike expectations higher, strengthens USD, pressures bonds. Weak print does the reverse. |
| CPI / Core CPI | Consumer price inflation; core strips food and energy | Monthly, mid-month | Primary inflation gauge central banks watch. Above-consensus CPI delays rate cuts and steepens the short end of the curve. |
| GDP | Total economic output, quarterly with multiple revisions | Quarterly | Confirms or challenges the recession/expansion narrative. Markets trade the trajectory, not the level. Advance estimate is the most market-moving. |
| PMI (Purchasing Managers' Index) | Business activity survey — above 50 = expansion, below 50 = contraction | Monthly (flash estimates mid-month) | Leading indicator: early read on activity before GDP confirms it. PMI below 50 for multiple months raises recession concerns and is bond-positive. |
| Initial Jobless Claims | Weekly count of new unemployment benefit claims | Every Thursday, 8:30am ET | High-frequency labour market read. Rising claims signal deterioration before NFP confirms it. Closely watched at rate cycle inflection points. |
| 5Y5Y Inflation Swap | Market-implied inflation expectation for 5 years starting 5 years from now | Continuous (market price) | The Fed's preferred market-based inflation anchor measure. Rising 5y5y signals markets doubt the central bank's ability to keep inflation contained long-term. |
Do not recite definitions. Say what the number was last time, whether it surprised, and what it meant for markets. The structure is: data point → market reaction → forward implication. "NFP came in at X vs the Y consensus — 2Y yields moved up 12bps on the day as the market repriced Fed cuts for this year. The question now is whether this is a trend or a one-off, and whether the next print reverts — because the market is currently pricing..." That pattern is the format of every good markets conversation at any level.
Credit markets
Credit is the market for corporate debt — bonds and loans issued by companies to fund their operations. The price of corporate debt reflects both the level of interest rates and the market's assessment of credit risk: the probability that the company cannot repay. The measure of this credit risk premium is the credit spread.
The credit spread is the difference in yield between a corporate bond and a government bond of the same maturity. A 10-year bond from a solid investment grade company might trade at "T+80" — 80 basis points above the equivalent 10-year Treasury. That 80bps is the market's compensation for taking corporate credit risk rather than risk-free government risk.
Investment grade vs high yield. Investment grade (IG) bonds — rated BBB- or above by S&P/Moody's — are issued by companies considered unlikely to default. High yield (HY) is rated BB+ or below. HY bonds carry wider spreads but higher nominal yields. The crossover is a critical threshold: when a company falls from BBB to BB ("fallen angel"), it is forced out of IG indices into HY indices, creating mechanical selling pressure regardless of the company's actual trajectory.
What drives spread movements. Spreads tighten when markets are confident about growth and corporate earnings — investors accept less compensation for credit risk. Spreads widen when recession fears rise, when a sector is stressed, or when a specific company shows financial distress. In a genuine risk-off episode, IG and HY spreads often widen simultaneously, with HY moving more violently because of lower liquidity and higher default probability.
CDS (Credit Default Swaps) are the derivative form of credit risk. Buying protection via a CDS is equivalent to buying insurance on a bond — if the issuer defaults, the protection buyer receives a payment. CDS allow traders to take short positions on corporate credit without borrowing actual bonds. Single-name CDS trade on individual companies; index CDS (CDX in the US, iTraxx in Europe) trade on baskets of names and are widely used for hedging broad credit exposure.
OAS (Option-Adjusted Spread) is the standard measure of credit spread that adjusts for any embedded optionality in the bond (like a call option that lets the issuer redeem early). For plain vanilla corporate bonds, OAS is approximately equal to the spread over the swap curve. IG OAS and HY OAS are the standard benchmark indices — tracked via BofA/ICE indices and available on FRED.
Credit spreads are one of the best real-time indicators of market risk sentiment — arguably more reliable than equity indices, which can be distorted by index concentration in a handful of mega-caps. When IG spreads widen sharply, it signals genuine concern about the economic cycle, not just equity market volatility. When spreads are historically tight, the risk is asymmetric: limited room for further tightening but significant room for widening. In 2024 much of the credit market traded at historically tight levels — a fact that shaped how sell-side desks thought about positioning and risk going into 2025–26.
Foreign exchange
FX is the world's most liquid market — over $7 trillion in daily volume — and the one asset class where everything is relative. A currency has no absolute value. GBP/USD = 1.34 only means something in relation to where it was yesterday, last year, or where interest rate and growth differentials suggest it should trade.
What drives currency moves. The primary fundamental drivers are interest rate differentials, growth differentials, and relative inflation. A country with higher interest rates attracts capital inflows — investors move money there to earn the higher yield — which appreciates the currency. This is the core of the carry trade: borrow in low-rate currencies (historically JPY, CHF) and invest in high-rate currencies (AUD, certain EM). The carry trade works until risk sentiment turns — when it unwinds, it does so violently.
Growth differentials matter because stronger growth attracts foreign investment. If US growth is outperforming European growth, capital flows toward the US, strengthening USD. Relative inflation matters because persistent higher inflation than trading partners causes a currency to depreciate over time through purchasing power parity — though this mechanism works on multi-year timescales, not days.
Political and policy risk can override fundamentals for extended periods. A government promising fiscal expansion may weaken the currency even if fundamentals are otherwise supportive — the gilt crisis of September 2022 being the most vivid recent UK example, where GBP/USD fell to historic lows within days of the Truss budget. Central bank intervention is rare among major economies but common in EM.
The major crosses you need to know: EUR/USD (the most liquid pair in the world), GBP/USD (cable), USD/JPY, and AUD/USD. For EM, USD/CNH (offshore renminbi) and EM currency baskets are the most actively traded in institutional markets. Know roughly where these trade and what the current drivers are — rate differentials, growth dynamics, political risk.
USD/JPY has been one of the most discussed currency pairs in institutional markets because of an extraordinary policy divergence: the Fed and other central banks were hiking aggressively while the BoJ held rates near zero under yield curve control. As the BoJ has slowly normalised — abandoning YCC, making tentative rate hikes — JPY has begun to recover and the enormous USD/JPY carry trade has partially unwound. Every BoJ meeting is now a potential source of major volatility in USD/JPY and in global carry trades that used JPY as the funding currency. The August 2024 carry trade unwind — one of the sharpest equity and FX moves of the year — originated largely from BoJ surprise hike expectations.
Equities
Equity markets are the most visible financial markets — the S&P 500 level is reported on the evening news. But what actually moves stocks is more nuanced than headlines suggest, and being able to articulate the real drivers separates S&T candidates from people who just check their ISA.
What actually moves stocks. In the short term: earnings and guidance surprises, central bank decisions, macro data, and sentiment or positioning shifts. In the medium term: the rate environment (because discount rates directly affect equity valuations), earnings growth trends, and sector rotation through the economic cycle. In the long term: real economic growth and corporate profitability.
Rates and equity valuations. Equities are priced as the present value of future earnings. When risk-free rates rise, the discount rate rises and the present value of future earnings falls — even if earnings forecasts are unchanged. This is why rising rates in 2022 drove such a severe equity selloff despite robust corporate earnings: the re-rating of the discount rate overwhelmed the fundamental picture. Understanding this mechanism is essential for any markets conversation in 2024–26.
P/E and forward P/E. The price-to-earnings ratio compares a stock's price to its annual earnings per share. A higher P/E means investors are paying more for each pound of earnings — either because they expect high earnings growth, or because low rates make equities relatively more attractive. Forward P/E uses next year's estimated earnings. The gap between current and forward P/E reflects expected earnings growth. When the S&P trades on a forward P/E of 22x and the historical average is 16x, someone needs to explain why — usually either higher expected earnings growth, lower rates, or both.
Index concentration. One of the defining features of current equity markets is that a handful of mega-cap technology companies dominate the major indices. At peak concentration, the top 10 S&P 500 names represented over 35% of the index. This means the "market" is increasingly a bet on a small number of AI and tech growth stories — and the average stock is often doing significantly worse than the headline index implies. Equal-weight S&P vs cap-weight S&P performance divergence is a useful indicator of how narrow market leadership is.
Earnings season. The four weeks after each quarter ends — when companies report results — is a period of heightened volatility. Individual stocks can move 10–20% on a single report if earnings or guidance diverges significantly from expectations. The trading desk will have positioned within limits ahead of earnings it has a view on and will be executing heavy client flow as results land throughout the day.
You are not being asked to pick stocks. You are being asked to show that you understand how the macro environment — rates, growth, earnings expectations — translates into equity market moves. The most valuable thing you can say is something that connects these layers: why equities rallied or sold off last month, whether that was a re-rating or an earnings story, and what the next catalyst is. Being able to articulate why a sector is outperforming (e.g. "financials have benefited from the higher-for-longer rate environment because net interest margins have expanded") is the register interviewers are looking for.
Commodities
You do not need deep commodity expertise for a generalist S&T interview. What you need is awareness of oil and gold — their current levels, what drives them, and a simple thesis on each. Beyond that, you should not overclaim.
Oil (WTI and Brent). Oil is priced primarily by the balance of supply and demand. On the supply side: OPEC+ production decisions are the dominant driver — the cartel controls roughly 40% of global production and its quota decisions move prices immediately. US shale production is the key non-OPEC swing factor — US rig counts and production data are watched closely. On the demand side: global growth is the dominant driver, with China being the marginal buyer that drives the most volatility. A slowdown in Chinese industrial activity has historically been one of the most reliable signals of oil weakness.
Oil also responds to geopolitical risk (conflict in oil-producing regions creates a risk premium), the dollar (oil is priced in USD, so a stronger dollar tends to be bearish for oil on a mechanical basis), and inventory data (the weekly EIA crude inventory report is the most market-moving regular oil data release).
Gold. Gold is more complex to value than oil because it has no fundamental earnings or cash flows. It trades as a combination of: an inflation hedge, a safe-haven asset, a dollar hedge (inverse correlation with USD), and a store of value in times of geopolitical uncertainty. Real interest rates are the most reliable single driver — when real rates (nominal rates minus expected inflation) fall, gold rallies, because the opportunity cost of holding a non-yielding asset falls. When real rates rise sharply, gold typically sells off. The extraordinary rally in gold from 2023 through 2025 — reaching and exceeding $3,000/oz — reflected both elevated geopolitical risk, de-dollarisation buying from central banks (particularly China, India, and other EM central banks diversifying reserves), and a broad decline in real rates as inflation normalised faster than nominal rates fell.
Have a simple, current thesis on oil and gold. For oil: know roughly where WTI is, what OPEC+ has been doing, and whether Chinese demand is a tailwind or headwind. For gold: know roughly where it is, and be able to explain the real rates / dollar / safe-haven framework. Beyond this, it is fine to say "I do not follow agricultural futures or base metals closely — I would want to learn on the desk." That is honest and appropriate. Pretending to have a view on soybeans when you do not is far worse than acknowledging the gap.
How to follow markets
Being asked "how do you follow the markets?" in an interview is a trap for people who name-drop sources they do not actually use. The question is designed to distinguish candidates who have built a genuine daily habit from those who skimmed a few articles the week before. The answer needs to be specific, honest, and grounded in things you can actually discuss.
The goal is not to read everything. It is to build a daily workflow that gives you a coherent view of what is happening across the main asset classes in 15–20 minutes — so that in any conversation about markets, you are current and have a view.
The teaching in this module is evergreen. Current market levels change daily. In the 24 hours before any interview, quickly check the following and note the approximate figures:
- US 10Y Treasury yield — FRED DGS10
- UK 10Y Gilt yield — FT Markets Data
- US 2Y yield & 2s10s spread — FRED T10Y2Y
- Fed Funds rate — Fed H.15
- BoE Bank Rate — Bank of England
- ECB deposit rate — ECB rates page
- S&P 500 level and YTD return
- FTSE 100 level
- VIX — FRED VIXCLS
- What is driving the index move
- GBP/USD (cable)
- EUR/USD
- USD/JPY
- Any notable recent move and why
- WTI crude oil price
- Gold spot price
- Simple thesis on each — supply/demand or macro driver
- Last CPI print vs consensus
- Last NFP vs consensus
- Last PMI reading (US and UK/EU)
- Any upcoming releases this week
You do not need to memorise exact levels — interviewers know you do not have a Bloomberg terminal. What matters is that you have checked, you know the rough picture, and you have a view on what is driving each. That is what "following markets" means in practice.
Knowledge test
15 questions across all nine sections. Concepts, mechanisms, and one scenario question per asset class.
You can explain why bond prices and yields move inversely, describe what an inverted yield curve signals and why, and give a one-sentence view on something moving in markets right now. Module 4.2a — Markets Interview Questions — is the direct application of everything in this module. If any of sections 2.2–2.5 feel uncertain, revisit them before moving on.
Module 3 — The Application →