Futures Tumble As Trump Tariffs Kick In

Futures are lower, tracking European and Asian markets, with the dollar plunging on mounting recession fears, as the Trump trade war officially started at midnight, although according to JPMorgan it could be even worse and the "downward reaction is muted given the significant, expected impact on the economy and earnings expectations." At the same time, Canada, China, and Mexico are rolling out their retaliatory measures. As of 8:00am ET, S&P futures are down 0.5%, and near session lows, while Nasdaq futures drop 0.6%, with Mag7 names sliding premarket and NVDA tumbling another 2.4% after plunging 8.7% on Monday. Investors will also be waiting to see what Trump says in his State of the Union speech tonight (some see it as a final hope for an off-ramp). Bond yields are mixed as the curve twists steeper and USD plunges amid rising fears the tariffs will accelerate a recession. Commodities are weaker with precious outperforming while energy stocks underperform as oil prices fall further after OPEC+ announced plans to revive halted production. WTI declines 0.8% to $67.80 a barrel, the lowest since December. There are no major macro data releases today and the Fed’s Williams speaks ~2.20pm EST; Trump's State of the Union address is at 9:00pm ET.

In premarket trading, Tesla is leading premarket losses among the Magnificent Seven stocks on Tuesday. Meanwhile, shares in Nvidia whipsaw a day after a selloff in the chipmaker wiped out almost $265 billion in market value, and extend their losses down another 2%. Walgreens Boots Alliance shares rise 6.1% after Bloomberg reported that Sycamore Partners is nearing an acquisition of the drugstore operator. Here are some other notable premarket movers:

• Okta (OKTA US) shares jump 16% after the infrastructure software company reported fourth-quarter results that beat expectations and gave an outlook that is above the analyst consensus.
• On Holding (ONON US) shares climb 11% after the Swiss sneaker maker reported fourth-quarter sales and gross margin that topped Wall Street expectations.
• Illumina (ILMN US) shares slip 3.5% after China banned the firm from selling genetic sequencing products in the country as part of a wave of retaliatory measures against fresh US tariffs on all Chinese goods.
• Viant Technology (DSP US) shares slide 10% after the digital advertising company reported fourth-quarter adjusted diluted earnings per share that missed estimates.

At midnight, a raft of new tariffs and countertariffs kicked in (full break down in the subsequent post), which mark Trump’s biggest push to remake global trade, and investors will be watching his address to Congress Tuesday for hints on future steps. Canada announced a sweeping package of tariffs in response and China retaliated by imposing tariffs as high as 15% on some US exports. 

There's more: Trump also said Monday that the US would impose tariffs on “external” agricultural products starting on April 2, adding another layer of threats to impose trade barriers on imported goods. He didn’t detail which products would be affected, or if there would be any exceptions. Trump also ordered a pause to all military aid to Ukraine, turning up the heat on Volodymyr Zelenskiy just days after an Oval Office blowup with the Ukrainian president left the support of his country’s most important ally in doubt.

“We need to know exactly what the US plan is towards European tariffs,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International. “It’s likely to be different from Canadian and Mexican tariffs, because the interrelationships are different. It’s a big unknown for European equity outperformance to continue.”

Stocks in Europe retreated on concern the region could be next to face US tariffs after President Donald Trump imposed levies on Mexico, Canada and China. Europe’s Stoxx 600 index slumped 1.2%, weighed down by automakers and energy stocks, after closing at a record in the previous session. European defense stocks bucked the broader slump amid expectations of increased military spending in the region. A basket of European defense stocks hit a record high as Thales SA jumped 8% after its results beat expectations, while Hensoldt AG rallied as much as 18%.  Here are some of the biggest movers on Tuesday:

• Lindt & Spruengli shares gain as much as 6.3% after the chocolate maker posted strong results and “impressive” free cash flow. 
• A European defense index hits a record high, supported by Thales’s post-results jump. Hensoldt also rallied on news the company will join the Stoxx Europe 600 Index.
• Eutelsat shares more than triple in two days, their biggest back-to-back gains ever, on optimism that European leaders’ pledge to boost military spending will aid the satellite operator.
• Inchcape shares jump as much as 9.7% after the automotive retailer and distributor announced a bigger share buyback and outlined new mid-term goals that are being welcomed by markets.
• European stocks exposed to the escalating global trade war slump, including automakers, Spanish banks, metals makers, beverage stocks and freight shippers. Continental shares fall as much as 9.3% after full-year results in which analysts point out a revenue miss. Bernstein cites a challenging 2025 outlook, which includes no tariff impact.
• European energy companies’ shares drop as oil slides on OPEC+’s plans to increase production, as well as concerns around the Trump administration’s trade tariffs.
• Forbo shares drop as much as 12% after the Swiss linoleum maker’s FY24 results fell short of expectations, according to Baader, which added the FY25E outlook suggests another challenging year.
• Fresenius Medical Care shares drop as much as 8.4%, the most since July, after a share offering by Fresenius SE was priced at a discount.
• Ashtead shares drop as much as 4.5% after the equipment rental giant posted a slowdown in US rental growth in the third quarter, according to Jefferies.
• Greggs shares fall as much as 14% as weaker like-for-like sales growth at the start of this year offset a slight beat on 2024 pretax profit.

In FX, the Bloomberg Dollar Spot Index fell for a second day. Haven assets outperform with the Swiss franc at the top of the G-10 FX leaderboard, rising 0.6% against the greenback. The yen is not far behind with a 0.5% gain. The euro rose as much as 0.3% to its highest level since Feb. 26 as the European Union proposed extending €150 billion ($158 billion) in loans to boost defense spending. Elsewhere, the Mexican peso weakened 0.9% against the greenback, while the Canadian dollar was slightly stronger after retreating for seven straight sessions.

In rates, treasuries are mixed with the curve steeper as US trading day begins, off session lows reached during Asia session as US tariffs on imports from Canada, Mexico and China drew reprisals. US front-end yields are richer by nearly 5bp near session lows with long-end yields slightly higher on the day, steepening 2s10 and 5s30s curves by ~4bp; 10-year around 4.14% is lower by 1bp, trailing yield declines of 2bp and 5bp for German and UK counterparts. Traders fully priced in three 25bp Fed rate cuts this year. US 5s30s spread touched widest level since Oct. 4, paced by German 5s30s reaching steepest level in more than two years amid steep declines for European stocks. Gilts lead a rally in European government bonds, with UK 10-year yields falling 5 bps to 4.51%.

In commodities, spot gold climbs $30 to around $2,920/oz. Bitcoin falls 2% to below $84,000.

Today's economic data calendar is blank, while Fed speaker slate includes New York Fed’s Williams at 2:20pm

Market Snapshot

• S&P 500 futures up 0.1% to 5,868.00
• STOXX Europe 600 down 0.9% to 558.13
• MXAP down 0.2% to 184.38
• MXAPJ down 0.3% to 575.62
• Nikkei down 1.2% to 37,331.18
• Topix down 0.7% to 2,710.18
• Hang Seng Index down 0.3% to 22,941.77
• Shanghai Composite up 0.2% to 3,324.21
• Sensex down 0.1% to 73,008.36
• Australia S&P/ASX 200 down 0.6% to 8,198.06
• Kospi down 0.2% to 2,528.92
• German 10Y yield little changed at 2.45%
• Euro up 0.3% to $1.0520
• Brent Futures down 1.4% to $70.59/bbl
• Gold spot up 1.0% to $2,920.89
• US Dollar Index down 0.49% to 106.23

Top Overnight News

• Trump ordered a pause on all military aid to Ukraine until he determines there’s a good-faith commitment to peace, a defense official said. The US will engage with Volodymyr Zelenskiy if he calls with a “serious proposal” to end the war, JD Vance told Fox. BBG
• Global government borrowing is expected to hit a record $12.3T this year, with the aggregate debt stock climbing to nearly $77T. FT
• The United States is drawing up a plan to potentially give Russia sanctions relief as President Donald Trump seeks to restore ties with Moscow and stop the war in Ukraine. RTRS
• Fed's Musalem (2025 voter) said the outlook is for continued solid economic growth, but recent consumer and housing data pose some downside risk. Musalem added that restrictive monetary policy is still needed to ensure inflation returns to the 2% target, while a patient approach to policy will help achieve the Fed's goals and sustain economic expansion.
• US Education Secretary McMahon said that President Trump has assigned them the 'final mission' to reduce bureaucratic inefficiencies within the Department of Education.
• China retaliates against Trump’s tariffs, imposing 15% duties on imports of US poultry, wheat, corn, and cotton, and 10% on soybeans, pork, beef, fruit, vegetables, and dairy, while 15 US firms were added to Beijing’s export control list and another 10 were put on the “unreliable entity list” (Illumina has been barred from exporting tools to China). SCMP
• Canada’s retaliatory tariff plan includes 25% levies on about C$30 billion ($20.8 billion) worth of goods from the US, with a second round on C$125 billion of products in three weeks. Mexican President Claudia Sheinbaum is expected to spell out her plan today.
• China plans to issue guidance encouraging domestic firms to use chips based on the RISC-V open-source standard instead of proprietary Western standards sold by the likes of ARM, AMD, and INTC. RTRS
• The RBA said last month’s rate reduction doesn’t commit the board to further easing, according to minutes of the meeting. CBA chief Matt Comyn said he expects a slower and shallower rate-cut cycle. BBG
• Leaders of Arab countries are set to meet in Cairo today to endorse a Gaza reconstruction plan to counter Trump’s proposals. BBG

Tariffs

• White House said President Trump proceeded with tariffs on imports from Canada and Mexico, while reports also noted that the extra 10% duty on Chinese goods took effect as the Tuesday deadline passed with no changes to tariff orders.
• US President Trump said on Monday that reciprocal tariffs start on April 2nd and tariffs on Canada and Mexico are to start on Tuesday, while also commented there is no room left for a deal on tariffs on Mexico and Canada, while he reiterated the plan to double the China tariff to 20% from 10%. Furthermore, Trump said will penalise countries weakening currencies with tariffs and mentioned China when talking about weak currencies and doesn't think China will retaliate too much, while the White House said President Trump signed an order to tariff China at 20%.
• US President Trump posted on Truth “To the Great Farmers of the United States: Get ready to start making a lot of agricultural product to be sold INSIDE of the United States. Tariffs will go on external product on April 2nd. Have fun!”
• Canada said it will impose retaliatory tariffs on US imports from Tuesday if US tariffs go into effect and will start with 25% tariffs on US imports worth CAD 30bln from Tuesday, while it will impose tariffs on an additional CAD 125bln worth of US imports in 21 days. Furthermore, it said tariffs will remain in place until the US trade action is withdrawn and it is in active discussions with provinces and territories to pursue several non-tariff measures if US tariffs do not cease.
• China announced additional tariffs on US goods as retaliation for March 4th tariffs in which it is to impose additional tariffs of up to 15% on some US goods from March 10th, while it announced to impose tariffs of 15% on US chicken, wheat, corn, and cotton, as well as tariffs of 10% on US soybeans, sorghum, pork, beef, aquatic products, fruits, vegetables, and dairy products. China also added 15 US entities to the export control list and added 10 US firms to the unreliable entity list and banned Illumina Inc from exporting gene sequencing machines to China from March 4.
• China's MOFCOM earlier stated that China will take countermeasures to firmly safeguard its rights and interests in response to US tariffs, while it urged the US to immediately withdraw its unilateral tariff measures, calling them unreasonable, groundless, harmful to others, and self-serving. Furthermore, it hopes the US will return to the right track of resolving differences through dialogue on an equal footing as soon as possible.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were pressured following the sell-off on Wall St where the S&P suffered its worst day of the year so far amid tech selling, weak ISM data and tariff confirmation. ASX 200 declined with nearly all sectors in the red and underperformance in energy after the recent drop in oil prices, while mixed data releases provided little to spur risk appetite. Nikkei 225 briefly retreated to beneath the 37,000 level amid the early broad risk-off mood and recent currency strength with Seven & I Holdings the worst hit after reports it is to reject Couche-Tard’s buyout proposal. Hang Seng and Shanghai Comp were initially pressured after US President Trump signed an order to raise tariffs on China to 20% from 10% and threatened to penalise countries weakening currencies with China also mentioned when talking about weak currencies, while China's MOFCOM later responded that China will take countermeasures to firmly safeguard its rights and interests in response to US tariffs. Nonetheless, the downside in the mainland was limited as China’s annual “Two sessions” gathering began in Beijing with participants anticipating China to outline stimulus plans, while confirmation of the tariffs and China's immediate retaliation did little to derail the resilience in the mainland.

Top Asian News

• China's NPC spokesperson announced that the 2025 annual parliamentary session will begin March 5th and conclude on March 11th, while there be three press conferences held on diplomacy, economy and livelihood. NPC spokesperson also said the Chinese government attaches high importance to the development of AI and its risk prevention and that China opposes overstretching the concept of national security or politicising economic and technological issues. The spokesperson said that the country’s economic operations face numerous difficulties and challenges, citing insufficient domestic demand, as well as production and operational struggles for some businesses, as well as noted that rising economic and political uncertainties internationally make it hard to stabilise external demand but also stated China's economy has a solid foundation, many advantages, strong resilience, and large potential.
• RBA Minutes stated the Board judged the case to cut rates was, on balance, the stronger one although it agreed decision did not commit them to further cuts in the cash rate and members expressed caution about the prospect of further easing. Furthermore, members placed more weight on the downside risks to the economy and were particularly mindful of the risk of keeping policy too tight for too long, while it was stated that if inflation proved persistent, rates might stay at 4.1% for an extended period or be raised.

European bourses (STOXX 600 -0.9%) opened in the red and have continued to trundle lower, as markets digest the latest tinderbox of uncertainty, which include; Trump tariff updates, the US stock market rout and increased EU defence spending. European sectors hold a strong negative bias, with most of the cyclical industries populating the bottom of the pile, given the risk tone. Food Beverage and Tobacco is buoyed by post-earning upside in Lindt (+5.3%). Energy and Autos are by far the clear underperformers in today’s session. The former hit by the sink in oil prices (OPEC+ confirmed oil hike) and Autos hampered on Trump tariff fears.

Top European News

• Morgan Stanley (MS) has changed its ECB rate call, now sees the central bank cutting rates in April.
• French Finance Minister Lombard says "we" must spend more on defence and faster, to spend more we will have to make efforts elsewhere. Do not want to increase tax on companies, want to look at how the wealthiest legally tax optimise
• EU Commission President von der Leyen says Europe is ready to "massively" boost defence spending; will propose to activate the national escape clause of the stability and growth pact & propose a new instrument that will provide EUR 150bln of loans. Propose that member states will be able to decide if they want to use the cohesion policy programmes to increase this spending. Rearm Europe that could mobilise close to EUR 800bln for a safe and resilient Europe. Aim to mobilise private capital through EIB, savings and investment union
• UK Chancellor Reeves says she will announce an intention to reduce unnecessary red tape which slows down the procuring of defence equipment.

FX

• DXY is once again on the backfoot as the support from Trump's tariff announcements yesterday proved to be shortlived. Selling in early European trade picked up alongside an appreciation of the EUR as EU's von der Leyen provided an update on the bloc's defence spending intentions. Today's docket is light in terms of data, however, Trump will be delivering his State of the Union address 21:00EST. DXY now down as low as 106.15 with the YTD trough in touching distance at 106.12
• EUR/USD is up for a second session in a row as prospects of increased European defence spending overshadow concerns over the global trade war in which Europe is a clear target of the Trump administration. European yields experienced another boost in early European trade after EU Commission President von der Leyen proposed a new instrument that will provide EUR 150bln of loans for defence spending.
• JPY has benefitted from the risk-aversion seen in the wake of Trump's decision to proceed with tariff hikes on Mexico, Canada and China as well as reaffirming that reciprocal tariffs will start on April 2nd. JPY has also been underpinned by dynamics in the domestic bond market with the 30yr yield hitting its highest level since October 2008. 148.61 is the low print for USD/JPY today with the YTD trough just below at 148.56.
• Cable is once again on the front foot after a solid showing yesterday which brought the pair from a 1.2577 low to a YTD peak at 1.2726. Fresh macro drivers for the UK are on the light side asides from a 0.7% contraction in the BRC shop price index overnight. As such, it may be the case that the USD leg of the equation provides the greater source of traction in the near-term. If yesterday's 1.2726 YTD peak is breached, the 200DMA kicks in at 1.2785.
• Antipodeans are both were knocked lower by Trump's decision to proceed with tariffs on Canada and Mexico as well as doubling tariffs on China to 20%. China's decision to retaliate to the US also added to the trade angst. Overnight data releases for Australia (retail sales and current account) were mixed and provided little traction for AUD.

Fixed Income

• Despite a lack of scheduled events USTs were in the driving seat early doors with a huge block trade sparking a bout of selling pressure in the benchmark and reverberating through the broader complex as well. Specifically, a 78k 10yr block at 111-19 hit at 07:33GMT when USTs themselves were trading at 111-23. Thereafter, the benchmark recovered a touch and got back towards earlier levels before then moving lower with EGBs.
• Given the ongoing bullish bias, with USTs firmer in a 111-13 to 111-28+ band, yields are lower across most of the curve aside from at the 20yr point which is essentially flat. Focus ahead is on the fallout of President Trump's allowing the tariff pause to end, and also on his State of the Union address this evening.
• Bunds are bid, benefitting from the tepid European tone as the region reacts to the imposition of tariffs by the US on Canada, China and Mexico. Note, nothing specific for Europe was announced by the US. Action which helped Bunds hit a 132.85 peak in the early morning with yields lower across the curve and the German 10yr moving back below the 2.5% mark after surmounting it on Monday; currently down to a 2.42% base and holding just within Monday’s 2.41-2.51% band.
• The morning’s main mover has been remarks from EU Commission President von der Leyen, who said that Europe is ready to “massively” boost defence spending, a plan labelled ReArm Europe which could mobilise as much as EUR 800bln for defence. This weighed on Bunds, trimming nearly 30 ticks over the course of around five minutes. Little reaction was seen despite a relatively weak 2030 Bobl outing.
• Gilts are firmer in-fitting with the above points and as the risk tone in the UK market is also weighed on by the latest measures from Trump. Action which has taken Gilts past yesterday’s 93.39 best by 11 ticks thus far. No sustained reaction to the morning’s DMO tap with Gilts continued to trade in proximity to Monday’s high.
• UK sells GBP 2.25bln 4.375% 2054 Gilt Auction: b/c 2.85x (prev. 2.75x), average yield 5.104% (prev. 5.198%) & tail 0.2bps (prev. 0.3bps)

Commodities

• WTI and Brent are on the backfoot but around USD 0.62/bbl and USD 0.88/bbl respectively, continuing the pressure seen in the pressure which was sparked by OPEC+ confirming that they will go ahead with the planned output hike in April. Furthermore, sentiment in Europe has been hit as markets digest the imposition of tariffs on China, Mexico and China.
• Precious metals are bid, benefiting from its haven status, given the risk-off sentiment seen today; XAU breached overnight highs in early European trade and currently sits at the upper end of a USD 2,882.14-2,921.27/oz range.
• Base metals are generally pressured, as the latest Trump tariffs hit sentiment, with China's levy doubled to 20%. 3M LME Copper currently lower by around 0.4% at USD 9,377.
• Kazakhstan Energy Ministry says they plan to increase oil exports via the Caspian CPC pipeline by 12% in March vs Feb to 6.7mln T.

Geopolitics: Middle East

• Israeli ground forces launched a major incursion into south Syria with a helicopter airdrop and armoured convoys headed to Tel al-Mal & al-Mashara in Quneitra & Daraa, according to a source on X.
• Israeli Foreign Minister Sarr declines to comment on reports of a deadline for resuming the war in Gaza, says "if we went to, we will do it". We are ready to continue to Phase Two of the ceasefire, but need an agreement to release hostages to extend framework.

Geopolitics: Ukraine

• Russia's Kremlin says it is "obvious that the US was the main supplier of the war" and if the US stops, it will be the best contribution to the cause of peace. Seems as if European countries will try to compensate Ukraine for the apparent loss of US military aid. Need to see how the situation develops on the ground. Too early to comments on reports of "White house seeks plans for Russian sanctions relief". To normalise relations, the sanctions need to be lifted.
• Finland's Intelligence Service says the biggest concern in the Baltic Sea is the Russian shadow flee. Russian sabotage actions are taking increasingly dangerous forms.
• Ukraine’s parliament said the country’s security is ensured by US support and described President Trump’s peacekeeping efforts as ‘decisive’ in ending the war.
• US President Trump said he will give an update on the Ukraine minerals deal on Tuesday night and doesn't think the Ukraine minerals deal is dead, while he added that Ukrainian President Zelensky should be more appreciative.
• White House official confirmed the US is pausing and reviewing Ukraine aid to assess if it is contributing towards a solution. It was also previously reported that the US is hitting the brakes on the flow of arms to Ukraine in which the Trump administration stopped financing new weapons sales to Ukraine and was considering freezing weapons shipments from US stockpiles, according to WSJ.
• US Vice President Vance said it is important for Ukrainian President Zelensky and Russian Putin to come to the negotiating table but added that Zelensky is still not willing to engage and President Trump is taking a realistic perspective on the Russia-Ukraine war. Vance said a minerals deal with Ukraine shows the US has a long-term investment in the country and leaders in Ukraine and Europe acknowledge privately that the Russia-Ukraine war cannot go on forever. Furthermore, Vance said Europeans need to be realistic on the Russia-Ukraine war and need to be saying to Zelensky that the war cannot go on forever.
• European official said the suspension of military aid to Ukraine will cause unnecessary civilian casualties and Ukraine will not be able to counter Russian raids after running out of air defence missiles, according to CNN.
• Europe's biggest powers are swinging behind efforts to seize over EUR 200bln of frozen Russian assets, as they draw up plans for a ceasefire deal in Ukraine, according to FT.
• Russia's Kremlin said it is premature to determine the location for the next round of Russia-US talks and that Russia-US talks on Ukraine are unlikely to resume until both countries' embassies return to full operational capacity. It was also reported that Russia’s envoy to international organisations said Russia is categorically against the deployment of European troops to Ukraine.
• China's Ministry of Ecology and Environment says it is collecting public opinion towards the regulation of the import of black mass for lithium-ion batteries and recycled steel materials.

US Event Calendar

• 14:20: Fed’s Williams Speaks at Bloomberg Invest Forum
• 9:10 p.m.: President Donald Trump delivers joint address to Congress

DB's Jim Reid concludes the overnight wrap

As I've said a few times over the last 2-3 weeks it feels like decades are happening over days. Ever since the Munich Security Conference in mid February a light switch flicked in European capitals and this has been turbo charged by events since the German election. A big prize to the person who entered 2025 short Nvidia (-15.1% YTD) and long German defence firm Rheinmetall (+86% YTD). You would have returned just over 100% so far in only two months. Even with tech slumping and defence surging, in the background the US administration is continuing to cause even more global upheaval and overnight by far the broadest set of tariffs yet has come into effect.

The 25% tariffs on Mexico and Canada that had been delayed a month ago took effect in the last couple of hours, with a lower 10% rate on Canadian energy. US imports from the two countries totalled over $900bn in 2024. And additional tariffs on China have been doubled to 20%, with Trump yesterday signing an executive order confirming the move he had signaled last week. There is still some market doubt as to whether all these tariffs will persist for a prolonged period of time. For instance, the Canadian dollar is trading at around 1.45 to the US dollar, well below the nearly 1.48 peak we saw when Trump first announced the 25% tariffs in early February. But we are clearly into unprecedented territory.

In response to the new US tariffs, the Canadian government has announced a retaliatory package that includes 25% tariffs on about 30bn Canadian dollars of US exports, with a second round of tariffs on 125bn of goods due in three weeks. Canada is also considering non-tariff measures, while Ontario’s premier yesterday said that he would pause nickel shipments to the US. On China’s side, its Commerce department announced countermeasures including tariffs of up to 15% on US goods including chicken, soybeans and cotton. These countermeasures are still hitting the wire as I type but Asian markets are relieved they haven't gone further so far.

Risk assets took a sharp turn lower during the US session yesterday (after a soft early session on weak data) as prospects of another late-hour delay to the tariffs dwindled, most notably with Trump telling reporters that there was “No room left for Mexico or for Canada”. The S&P 500 (-1.76%) fell from being near flat around lunchtime to post its worst day of 2025 so far. Both the small cap Russell 2000 (-2.81%) and the tech heavy NASDAQ (-2.64%) underperformed, while the Mag-7 (-3.09%) is now down more than 10% in the past two weeks, with yesterday’s decline again led by Nvidia (-8.69%).

The increased volatility saw the VIX post its biggest spike and highest year to date close (+3.15pts to 22.78). Other risk assets also suffered, with US high yield credit spreads (+8bps to 288bps) rising to their highest level since October, while Brent crude oil (-2.13% to $71.62/bbl) fell to a new 2025 low. And in the crypto space, Bitcoin (-9.53%) gave up the +9.59% gain it saw on Sunday after Trump’s announcement of a new strategic crypto reserve and is trading another -1.40% lower this morning. And in a turnaround from some of the earlier tariff headline, the dollar index fell -0.81% yesterday, its largest decline in four weeks.

This changing reaction of the dollar comes amid an apparent broader shift in market perspectives on tariffs over the past few weeks, with the focus moving from the potential boost to inflation to the negative implications for growth. In turn, this has driven a continued rally in US rates. This morning fed funds futures are pricing in a full 75bps of cuts by the December meeting. 2yr Treasury yields (-3.9bps) fell to 3.95% yesterday, their lowest since October, while the 10yr yield (-5.3bps to 4.16%) posted its ninth decline in ten sessions, with a near 40bp retreat over the past two weeks. And perhaps the best example of the dramatic market narrative shift is the 2yr real Treasury yield, which is down to below 0.70% this morning, more than halving from its 1.47% peak on January 22, just after Trump took office.

The recent narrative of US data weakness continued with yesterday’s ISM manufacturing print. The headline index was down to just 50.3 (vs. 50.7 expected), ending a run of 3 consecutive monthly gains. And other activity details saw a bigger decline, with the new orders (48.6 vs 54.6 expected) and employment (47.6 vs 50.1 expected) components concerningly weak. At the same time, the prices paid indicator surged to 62.4. That’s the highest since June 2022, at the height of the recent inflation surge, and adds to other indicators including the PMIs and consumer surveys that have painted a more stagflationary picture. To be fair, yesterday’s final S&P US PMI was actually stronger than expected at 52.7 (51.6 expected) but the longer standing ISM seemed to dominate.

Yesterday’s other major headlines came around Ukraine, with the White House confirming late yesterday that Trump had paused all existing military aid to Ukraine (that had been drawn down by the outgoing Biden administration), in a setback for hopes that relations between Kyiv and Washington can recover from the ill-fated Oval Office meeting last Friday. In other related news, the FT reported last night that French officials were putting forward a proposal to European capitals that would see around EUR 200bn of Russian reserves that are frozen in Europe seized outright if Moscow were to violate a future ceasefire deal.

Prior to all that, the main story in Europe had actually been a huge risk-on move, as investors reacted to the weekend reports that Germany was considering special funds for defence and infrastructure. That pushed the STOXX 600 (+1.07%) to yet another all-time high, building on its run of 10 consecutive weekly gains. And if we get an 11th weekly advance this week, it would be the first time that’s happened since summer 2012, back when Mario Draghi said the ECB would do “whatever it takes” to save the Euro. So purely from a market standpoint, the sentiment around Europe is phenomenally positive right now. That might be tested this morning though given the tariff news.

Understandably, it was defence stocks that witnessed the strongest gains, as investors adapted to a new paradigm of significantly higher defence spending. For instance, the STOXX Aerospace & Defense Index (+7.70%) put in its strongest daily performance since November 2020, the day that the Pfizer vaccine announcement offered a path out of the pandemic. Germany’s Rheinmetall (+13.71%) remained at the forefront of that surge, extending its YTD gains to +86%, whilst BAE Systems were up +14.58% as well. The moves saw the German DAX rise +2.64%, marking its strongest daily performance since November 2022. And there might be further news over the coming days, as CDU leader Friedrich Merz has said that he wants to reach a deal on defence before the summit of EU leaders on Thursday.

As our chief German economist Robin Winkler writes (link here), if these reports are realised, then it would be a fiscal regime shift of historic proportions. Indeed, he points out that even if it’s spent over a decade, it would be about as much money as the country has invested in East Germany since reunification. And assuming they were spent and smoothed out over 10 years, the fiscal impulse would be worth up to 2% of GDP, kicking in from 2026 onwards. In turn, the fiscal impact had a clear effect on European rates yesterday. For instance, 10yr bund yields (+8.5bps) saw their biggest daily jump since October, putting them back up to 2.49%. Moreover, there was a significant curve steepening, with the German 2s10s curve moving up to 42bps, which is its steepest since late-2022, back when the ECB were hiking rates by 75bps per meeting. Elsewhere in Europe there was a similar pattern, with yields on 10yr OATs (+7.1bps), BTPs (+6.3bps) and gilts (+7.3bps) all moving higher as well. Much of this could be reversed this morning after the late US news and moves.

The rate moves higher yesterday though got a further boost from the latest Euro Area CPI print yesterday. It came in a bit higher than expected, with the flash release for February only falling to +2.4% (vs. +2.3% expected). Core CPI was also a tenth above expectations at +2.6%. So that continues the global theme whereby inflation is still lingering above target.

Asian markets are extending the US sell-off with the Nikkei (-1.89%) the biggest underperformer but with Chinese risk recovering from a weak opening as the Chinese retaliation has been seen to be measured so far but headline are still coming through as I type on this. The Hang Seng (-0.07%) has recovered well and the Shanghai Comp is actually now +0.15%. Elsewhere, the KOSPI (-0.08%) is flat after being on holiday yesterday and missing a rally. S&P 500 (+0.27%) and NASDAQ 100 (+0.46%) futures are rebounding a bit from yesterday's slump.

Early morning data showed that Japan’s jobless rate unexpectedly edged higher to +2.5% in January (v/s +2.4% expected). It followed a revised +2.5% in December, thus keeping January’s rate unchanged for the fourth straight month. Meanwhile, Japan’s corporate spending dropped - 0.2% y/y in the fourth quarter (v/s +5.0% expected; +8.1% previous quarter), marking the first quarterly fall in nearly four years amid growing uncertainties over the global economy. Corporate sales rose +2.5% in the fourth quarter from a year earlier, less than the expected +3.0%. Elsewhere, South Korea's manufacturing PMI fell to 49.9 in February, the fourth time in six months it's been below 50.

To the day ahead now, and a key highlight will be President Trump’s speech to a joint session of Congress. Central bank speakers include New York Fed President Williams. And data releases include the Euro Area unemployment rate for January.