Futures Drop As Momentum Massacre Crushes Bitcoin

US equity futures, and Asian markets are lower as the recent tech-led selloff on Wall Street accelerated, sparking further risk-off behavior and momentum liquidations, and spilling over into bitcoin which plunged to a 3 month low breaking below its post election support. As of 7:00am, S&P futures are down 0.3% and are outperforming Nasdaq futs which are down 0.5%; sentiment was dented after Trump said that Canada/Mexico tariffs would be implemented on-time. Mag7 names and semis are lower with NVDA down 1.6%; Europe's ASML and STMicroelectronics also Bloomberg reported that the Trump admin is planning to expand efforts to limit China's technological advancements, including tougher semiconductor curbs and pressuring allies to escalate restrictions on China's chip industry. The ongoing stock rout sparked a rally in Treasuries that has pushed US 10-year yields down 6 bps to 4.34%. Traders also added to their Federal Reserve interest-rate cut bets with ~53 bps of easing now priced in by year end; the USD is flat. Commodities are mostly lower with crude/gasoline higher. Today’s macro data focus is on Housing, regional Fed activity indicators, and Consumer Confidence. 

Meanwhile Bitcoin tumbled 7%, dropping below $90,000 and sliding to a 3 month low of $88,000 breaking post-election support levels, as the recent momentum massacre sparked a brutal crypto selloff; meanwhile DeepSeek reopened access to its core programming interface after nearly a three-week suspension.

In premarket trading, Nvidia led premarket losses among the Mag 7 stocks after Bloomberg News reported that Donald Trump’s administration is pressuring US allies to escalate their chip restrictions on China (Nvidia -1.3%, Alphabet -0.7%, Amazon, Alphabet, Microsoft, Meta and Apple were falling less than 1%, Tesla was little changed). US-listed Chinese stocks broadly rebound, with Alibaba rising 3.8% following its biggest drop since 2022; JD.com is up 1.8%, PDD +1.4%, Baidu +0.8%, Bilibili +2.8%. here are some other notable premarket movers:

• Chegg shares tumble 22%, after the education technology company’s first-quarter projections for revenue and adjusted Ebitda trailed Wall Street expectations.
• Hims & Hers Health shares slide 18% in premarket trading after the telehealth company reported fourth-quarter results and said it will soon stop selling some compound weight-loss drugs. While the results were solid, Piper Sandler noted that there was a high level of uncertainty for 2025.
• Cryptocurrency-exposed stocks slide as Bitcoin tumbles below $90,000 to hit the lowest level since mid-November, paring the gains seen since Donald Trump’s election to the White House. MicroStrategy -5.9%, Coinbase -5.6%, Riot Platforms -4.4%, MARA Holdings -6%, Bit Digital -6.6%, CleanSpark -5.8%, Hut 8 Mining -6.7%
• Zoom Communications shares fall 5%, after the communications software company gave a forecast that is modestly weaker than expected.

As broad-based selling swept markets, the VIX Index touched its highest level this year at just below 20. There didn’t appear to be a single catalyst for the selling - the suddenly pervasive pessimism was correctly described here two days ago in "Goldman Traders Hit The Panic Button: Perfect Sell Storm Of Positioning, Valuation, Breadth, Concentration And Policy"- although concerns are mounting that President Trump’s policies will hurt global economic growth. Uncertainty on trade policies has prompted investors to pare risk and switch to havens like Treasuries or gold. Trump signaled Monday that tariffs on Mexican and Canadian imports will go ahead.

“At the moment there’s a lot of uncertainty reigning in the background which is making it challenging for investors to navigate,” said Alexandra Morris, an investment director at Skagen AS. “The whole tariff discussion is the main negative catalyst.”

Nvidia’s earnings report on Wednesday could be yet another catalyst to unleash volatility given its outsized impact on the broader market.

“Bear in mind that the market impact of Nvidia’s results have often proved to be as significant as US jobs reports over the last couple of years,” Deutsche Bank AG strategist Jim Reid wrote in a note to clients.

In Europe, tech stocks also underperformed but have been offset by gains in healthcare and banks with the Stoxx 600 rising 0.3%. European defense stocks rose after Bloomberg reported that Germany’s chancellor-in-waiting Friedrich Merz is in talks with the Social Democrats to approve up to €200 billion in special defense spending. Unilever shares fell after the company announced in a surprise move that CEO Hein Schumacher would step down and pass the reins to CFO Fernando Fernandez. Here are the biggest movers Tuesday:

• Smith & Nephew shares rise as much as 10%, the most since August, after reporting 4Q sales that beat estimates. The report is likely to reassure investors, RBC said, flagging particular strength in orthopaedics in the US
• Novo Nordisk rises as much as 5.2%, to the highest since Dec. 20, after US firm Hims & Hers Health said it will soon stop selling some compound weight-loss drugs rivaling the Danish company’s offering
• Galp Energia shares jump as much as 7.9%, the most in 10 months, after the company reported success at its latest exploration well off Namibia, boosting confidence in the company’s broader Namibia play
• Thyssenkrupp shares rise as much as 15% in Frankfurt, to the highest since October 2023, after Citi increased its price target, citing the potential value unlock from the company’s marine and steel businesses
• Dormakaba shares gain as much as 3.9%, to the highest level since 2021, after the Swiss security company lifted profit guidance slightly and posted solid results
• European semiconductor stocks drop after Bloomberg reported that the Trump administration is pressuring US allies to escalate their chip restrictions on China
• European mining stocks fell after iron ore, copper and aluminum dropped in response to moves by the US to restrict Chinese investments
• Unilever shares drop as much as 3.4% in London trading after the consumer goods company said Hein Schumacher would step down as chief executive officer and board director
• SIG Group shares tumble as much as 13%, the most in five years, after the Swiss carton-packaging maker reported subdued full-year results. Analysts cite falling profitability, low growth in the Americas
• European automakers underperform after passenger-car registrations dropped in January, while electric vehicle sales jumped; total sales in the region declined 2.1% year on year

Earlier in the session,  Asian stocks fell as US President Donald Trump’s continued attempts to pressure China and other nations dented investor sentiment. The MSCI Asia Pacific Index slid as much as 1.4% before paring some losses. Chinese stocks whipsawed throughout the day, showcasing the volatility sparked by uncertainties around Trump’s actions. His administration is said to be sketching out tougher versions of US semiconductor curbs and pressuring key allies to escalate their restrictions on China’s chip industry. According to Bloomberg, Trump officials recently met with their Japanese and Dutch counterparts about restricting Tokyo Electron Ltd. and ASML Holding NV engineers from maintaining semiconductor gear in China, according to people familiar with the matter. This comes after a directive set the stage for a more muscular use of the Committee on Foreign Investment in the United States, or CFIUS, a secretive panel that scrutinizes proposals by foreign entities to buy US companies or property, to thwart Chinese investment. The Hang Seng Tech Index had slumped as much as 4.4%, pacing losses for Chinese equities in New York. The gauge later erased most of its decline as more than $1 billion worth of money poured into Hong Kong stocks from China. JPMorgan strategists said US moves to limit investment in China tech may trigger a reversal in mainland stocks after the recent rally, while some investors saw an opportunity buy on dips. TSMC, Hitachi and Alibaba were among the biggest drags on the regional gauge. Most national benchmarks were in the red.

In FX, the Bloomberg Dollar Spot Index rises 0.1%. The Aussie and kiwi dollars underperform, falling 0.4% each.

In rates, bonds surged, pushing the yield on 10-year Treasuries down six basis to 4.34%. The treasury rally sent yields to YTD lows, fueled by risk aversion tied to the potential for US tariff policies to dent economic growth. Swap spreads are notably tighter, a sign that receiving flows are a driver. In short-term rates, Fed-dated OIS revert to fully pricing in two 25bp rate cuts by year-end. US yields are near session lows, 6bp-8bp richer across maturities with gains led by the belly, steepening 5s30s spread by 2bp; 10-year touched 4.32% and outperforms German counterpart by 7bp, UK by 3bp. 10- and 30-year swap spreads are nearly 2bp tighter on the day; Dallas Fed President Lorie Logan during London morning said the central bank when it stops balance-sheet runoff should purchase more shorter-term than longer-term securities to mirror the composition of Treasury issuance. A widely-watched gauge of the attractiveness of German debt fell to the most negative on record, reflecting expectations for higher borrowing to fund big outlays on defense spending. Gilts followed Treasuries higher, with UK 10-year yields falling 3 bps to 4.53%. German 10-year borrowing costs are flat at 2.47% as bunds were held back by reports of emergency defense spending.

In commodities, oil prices are steady with WTI near $70.80 a barrel. Spot gold falls $10 to $2,941/oz. Bitcoin tumbled below $90,000 to hit the lowest since mid-November as investors stepped back from one of the most popular Trump trades.

Looking at today's calendar, we get the February Philadelphia Fed non-manufacturing activity (8:30am), December FHFA house price index and S&P CoreLogic home prices (9am), February consumer confidence and Richmond Fed manufacturing index (10am) and February Dallas Fed services activity (10:30am). Fed speaker slate also includes Barr (11:45am) and Barkin (1pm)

Market Snapshot

• S&P 500 futures down 0.1% to 5,994.50
• STOXX Europe 600 up 0.3% to 555.01
• MXAP down 1.1% to 187.58
• MXAPJ down 1.3% to 589.62
• Nikkei down 1.4% to 38,237.79
• Topix down 0.4% to 2,724.70
• Hang Seng Index down 1.3% to 23,034.02
• Shanghai Composite down 0.8% to 3,346.04
• Sensex up 0.2% to 74,613.76
• Australia S&P/ASX 200 down 0.7% to 8,251.91
• Kospi down 0.6% to 2,630.29
• German 10Y yield little changed at 2.47%
• Euro little changed at $1.0472
• Brent Futures little changed at $74.81/bbl
• Gold spot down 0.4% to $2,940.73
• US Dollar Index little changed at 106.64 

Top Overnight News

• Donald Trump’s administration is sketching out tougher versions of US semiconductor curbs and pressuring key allies to escalate their restrictions on China’s chip industry, an early indication the new US president plans to expand efforts that began under Joe Biden to limit Beijing’s technological prowess. BBG
• President Donald Trump’s Federal Trade Commission will “vigorously” sue to block illegal mergers, the agency’s new chairman said Monday, highlighting support for the repeated deal challenges during the Biden era. BBG
• President Donald Trump said on Monday that tariffs on Canadian and Mexican imports are "on time and on schedule" despite efforts by the countries to beef up border security and halt the flow of fentanyl into the U.S. ahead of a March 4 deadline. RTRS
• French President Emmanuel Macron said a truce in Ukraine could come in “weeks” after meeting with Trump at the White House but added that a deal “must not mean a surrender of Ukraine.” BBG
• Fed's Goolsbee (2025 voter) said if the administration enacts policies that drive up prices, the Fed has to take them into account by law, while he added that auto parts suppliers have expressed concerns about tariffs and before the Fed can go back to cutting rates, it needs more clarity. Furthermore, Goolsbee said the full details of the administration’s policy package are still to be determined and they have to take a wait-and-see posture.
• Fed's Logan (2026 Voter) does not comment on monetary policy in prepared remarks; says once quantitative tightening ends, it would make sense to overweight purchases of shorter dated securities; floats idea of discount window loan facility.
• Elon Musk said subject to the discretion of the President, employees will be given another chance and a failure to respond a second time will result in termination.
• Tesla’s European sales plunged 45% year on year in January to fewer than 10,000, as rival carmakers saw a surge in EV demand. It began rolling out driver-assistance capabilities in China. BBG
• BofA Global Markets President DeMare says clients are doing less today than Q4 and the beginning of the year; still a good quarter even with client uncertainty, via Bloomberg TV. Says if they do not see productivity from AI, then investments will be scaled back.
• China is increasing scrutiny of outbound investments by domestic companies as well as their use of proceeds from Hong Kong share sales, people familiar said. BBG
• South Korea’s central bank lowered its policy rate by 25bp, as expected, and trimmed its growth forecast for the country as it resumed easing to support a sagging economy. WSJ
• MSFT - Goldman reiterates its Buy rating, $500 PT, and leaves its estimates for $88bn/91bn in FY25/26 CapEx unchanged following recent reporting that Microsoft has potentially delayed or canceled some of its AI data center leases. While unconfirmed, GS believe this reporting emphasizes what the company has already telegraphed: that as a responsible capital allocator, Microsoft continues to invest in AI capacity prudently with an eye towards returns. GIR
• A gauge measuring the attractiveness of German bonds hit a record low, in anticipation of more debt sales. BBG

Tariffs/Trade

• US President Trump's team is seeking to tighten chip controls on China with the US said to be pressing Japan and Netherlands to align on China restrictions, while it is weighing tighter controls on Nvidia (NVDA) chip exports to China, as well as considering more restrictions on SMIC (981 HK) and CXMT. Furthermore, US officials reportedly met with Japanese and Dutch counterparts to restrict Tokyo Electron (8035 JT) and ASML (ASML NA) engineers from maintaining semiconductor equipment in China, according to Bloomberg.
• Mexico studies tariffs on China in a bid to strike a deal with US President Trump, while Mexican President Sheinbaum said she sees agreements with the US by Friday and that Mexican officials are in Washington studying possible China levies, according to Bloomberg.
• WTO panel is to examine measures adopted by Turkey targeting Chinese EV imports.
• French President Macron said he hoped he convinced Trump on trade and noted that they do not tariff the US, while he added that they don't need a trade war and the urgency is to increase security expenditure.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded lower following the weak handover from the US where the tech sector led the declines and risk appetite was sapped amid ongoing uncertainty surrounding tariffs and geopolitics. ASX 200 retreated with underperformance seen in the tech, consumer discretionary and financial sectors, while defensives showed resilience and energy was also lifted following a jump in Woodside Energy's profit. Nikkei 225 slumped at the open on return from the long weekend but was off worse levels as shares of Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo rallied following reports late last week that Berkshire Hathaway plans to gradually raise its investments in Japanese trading houses. Hang Seng and Shanghai Comp conformed to the negative mood amid headwinds from trade frictions with the US seeking to tighten chip controls on China and after the PBoC's MLF operation resulted in a net drain of CNY 200bln. Nonetheless, Chinese markets were well off today's worst levels as the heavy slump at the open spurred some dip buying.

Top Asian News

• PBoC conducted a CNY 300bln 1-year MLF operation with the rate kept at 2.00% for a net drain of CNY 200bln.
• Huawei improved production of AI chips and achieved a yield close to 40% which marks a breakthrough for China's tech goals, according to the FT.
• Bank of Korea cut its base rate by 25 basis points to 2.75%, as expected, with the rate decision unanimous and interest rates for the special loan programme were also lowered. BoK said US tariff policies, Fed policies, and stimulus measures by the Korean government are some of the uncertainties for the economy, while it noted it is necessary to remain cautious about high FX volatility. BoK Governor Rhee stated that four board members said current policy rates could be maintained for the next three months and two board members said further rate cuts are possible for the next three months, while Rhee added that the market consensus expecting two more rate cuts this year aligns closely with the central bank's views.
• PBoC Advisor says Chinese CPI will decline moderately in February; changes in external environment will increase pressure on expanding domestic demand this year.
• Opposition Japan innovation party (ISHIN) agrees on details of LDP, Komeito Coalition's revised state budget, according to a party official; revised state budget would pave way for passage of JPY 115tln FY2025-26 budget.
• China's MOFCOM urges the EU to stop listing Chinese enterprises and to cease spreading false accusations against China; China will take necessary measures to firmly protect the legitimate rights and interests of Chinese enterprises.

European bourses (STOXX 600 +0.2%) are mostly modestly firmer vs. an entirely negative open; sentiment gradually improved as the morning progressed, paring some of the early-morning losses following a negative APAC handover. European sectors are mixed vs opening mostly lower. Healthcare tops the pile, with Novo Nordisk (+4%) shares on the front foot. Tech is the clear underperformer today, after Bloomberg reported that US President Trump's team is seeking to tighten chip controls on China; it was also said that US officials reportedly met with Japanese and Dutch counterparts to restrict Tokyo Electron and ASML engineers from maintaining semiconductor equipment in China.

Top European News

• ECB's Nagel says inflation outlook is fairly encouraging; persistent core and services inflation warrants caution, via Bloomberg; German economy in "stubborn" stagnation; ECB should take one step at a time and not rush more cuts. Hopes for swift formation of the new German economy.
• ECB's Kazaks says "I think we have to continue cutting rates", via Bloomberg; will take rate cuts "step by step", rate path to hinge on Trump policies. Must be cautious as we near the end of the terminal rate. Joint borrowing instrument needed for big investments. Europe at a critical point, need to invest in defence.
• Reuters poll: 66/66 expect the BoE to hold rates at 4.5% in March with a median view of a cut in Q2 to 4.25%.

FX

• After a pick-up late in the US session yesterday, DXY is a touch lower in early European trade. Trump was able to provide the dollar with some support yesterday after stating that he will be proceeding with tariffs on Mexico and Canada. Today's data slate sees the release of US Conference Board consumer confidence which is expected to slip to 102.5 from 104.1. Today's speaker slate includes Fed's Barr and Barkin. DXY is currently within a 106.56-79 range and above yesterday's YTD low at 106.12.
• EUR is trivially firmer/flat vs. the USD with focus in Europe primarily on the political landscape in the wake of the fallout of the German Federal Election and the subsequent coalition-building process. From a monetary policy perspective, the latest ECB Euro Area Indicator of Negotiated Wage Rates showed Q4 wage growth slow to 4.12% from 5.43% but had little sway on EUR. Note ECB’s Schnabel is due to speak at 13:00GMT. EUR/USD is currently tucked within Monday's 1.0453-0528 range.
• USD/JPY initially edged higher overnight and briefly reclaimed the 150.00 status but then faded the gains amid the broad downbeat risk tone across the APAC region and Japanese Services PPI data which slightly accelerated as expected. USD/JPY has delved as low as 149.20 with the next downside target coming via Monday's YTD low at 148.84.
• GBP is flat vs. the USD and EUR with macro newsflow light for the UK. We heard yesterday from BoE's Dhingra who remarked that if rates are lowered by 25bps at a quarterly pace, you will still be in restrictive territory all of this year. That being said, she is very much viewed as s dovish outlier on the MPC. Of greater interest today is comments from BoE Chief Economist Pill. Currently trading within a 1.2607-38 range.
• Antipodeans are both a touch softer vs. the USD. AUD/USD is down for a third consecutive session after printing a YTD peak at 0.6408 last Friday. Fresh macro drivers are lacking for Australia with attention instead turning to January inflation data due overnight with consensus looking for weighted CPI Y/Y to hold steady at 2.5%.
• PBoC set USD/CNY mid-point at 7.1726 vs exp. 7.2530 (prev. 7.1717).
• RBI is seen as likely to be selling USD's to stop the INR's downside, via Reuters citing traders.

Fixed Income

• USTs are firmer, picked up a touch on Monday’s strong 2yr outing before grinding marginally higher overnight and then lifting back above the 110-00 mark to a 110-09 peak in the European morning, a high the benchmark has remained in proximity to since. Ahead, the speakers continue with Barr & Barkin due before POTUS signs his latest executive order. Amidst that, the US will sell 70bln of 5yr notes; follows a 2yr which saw a slightly softer b/c than the prior but still a strong level of demand, particularly for the indirect figure.
• Bunds towards the top-end of a 131.87-132.45 band with the benchmark essentially flat as participants continue to digest the German election and await clues on coalition talks; the high printed just before the EZ wage tracker as the general risk tone took another modest leg lower. On the latter, the figure moderated from the prior in-fitting with proxies while an extensive text release from ECB’s Nagel largely focussed on the Bundesbank's accounts while monetary comments were in-fitting with his hawkish bias. No reaction to either event. A well received German Green Bund outing also had little impact.
• Gilts are firmer, somewhere between USTs and Bunds in terms of magnitude as the benchmark acknowledges both the tepid risk tone and reports suggesting the UK could get involved in European-wide defence spending; a source cited by the FT said the UK Treasury “is interested in” the idea of a rearmament bank for such funding. Given that structuring spending in this way would limit the impact on Reeves’ fiscal position. Gilts find themselves in the green and holding towards the top-end of a slim 92.67-91 band.
• UK sells GBP 1.6bln 1.125% 2035 I/L Gilt: b/c 3.52x (prev. 3.12x) and real yield 1.115% (prev. 1.128%).
• Germany sells EUR 1.495bln vs exp EUR 1.5bln 1.80% 2053 Green Bund: b/c 2.4x (prev. 2.6x), average yield 2.73% (prev. 2.84%) & retention 0.33% (prev. 24.60%)
• Italy sells EUR 2.75bln vs exp. EUR 2.5-2.75bln 2.55% 2027 & EUR 1.5bln vs exp. EUR 1.25-1.5bln 1.80% 2036 BTP€i
• German 10-year spread to swaps hit the most negative on record, according to Bloomberg.
• Saudi Arabia offers Middle East's first sovereign Euro Green Bond, via Bloomberg; 7-year Green Bond IPT mid swaps +155bps, 12-year Conventional Bond IPT mid swaps +175bps, according to IFR.

Commodities

• Crude is a little firmer in what has been a lacklustre and choppy session for the complex thus far. Initially oil prices were subdued alongside the risk-off sentiment seen in early-European trade, but did improve a touch thereafter. More recently, prices have been choppy with Brent May currently trading in a USD 74.17-76/bbl parameter.
• Subdued trade across precious metals despite the softer Dollar but with price action contained to tight ranges amid a lack of driver this morning. Spot gold remains at the record highs printed yesterday (USD 2,956.31/oz) with today's range currently between USD 2,929.64-2,953.42/oz.
• Lacklustre trade across base metals despite the weaker Dollar but with the broader sentiment on the back foot and newsflow on the quieter side. 3M LME copper currently resides in a USD 9,424.95-9,500.05/t range after finding resistance at the half-round figure.
• US President Trump commented on Truth that they want the Keystone XL Pipeline built and suggested easy approvals.
• India could reportedly extend import curbs on low ash metallurgical coal used in steelmaking, according to Reuters sources.
• IEA Director says Europe has been importing a lot of Russian LNG to help economies; might be a high time to replace it with LNG from Qatar beginning 2027.

Geopolitics

• Russia's Kremlin says President Putin is "okay" with European peacekeepers in Ukraine, refers to earlier statement that such a move would be unacceptable. When asked about a possible US-Russia rare earths deal, says the US needs rare earth minerals, and "Russia has a lot". Many steps need to be taken to restore trust between the US and Russia. When asked about the UN vote on Ukraine on Monday, says it sees the US taking a much more balanced stance. Says European stance on Ukraine may become more balanced as a result of contacts with the US.
• US President Trump said he emphasised the importance of the critical minerals and rare earth deal with Ukraine in meeting with French President Macron, while Trump added that he is in serious discussions with Russian President Putin about ending the war and talks are proceeding very well. Trump also said he was talking with French President Macron about trade deals at the White House and will meet with Ukrainian President Zelensky either this week or next to sign a minerals deal. Trump later said he had great conversations including with Russia on ending the Ukraine war and the meeting with French President Macron is another step forward towards ending the war.
• French President Macron said they need something substantial for Ukraine and Europe, while he stated his message to US President Trump was to be careful and that they have to go fast but first need a truce in Ukraine. Macron also stated that he thinks he had a strong convergence with Trump on Ukraine and a truce could be reached in the coming weeks, as well as noted that it is feasible to establish a truce at least and start negotiating for peace. Furthermore, Macron said he is working with the UK on a UK-France proposal for presence to maintain peace with US backup and backstop, while he spoke with European leaders and that many are ready to be part of security guarantees.
• UN General Assembly adopted the amended US-drafted Ukraine resolution that backs Ukraine's sovereignty and territorial integrity, while it approved all proposed European amendments to the US-drafted resolution on Ukraine and rejected the proposed Russian amendment to the US-drafted resolution on the Ukraine war anniversary. It was later reported that Russia failed at the UN Security Council to amend the US-drafted resolution on Ukraine and vetoed a European attempt to amend the US-drafted resolution on Ukraine, while the UN Security Council adopted the US-drafted resolution on Ukraine.
• Poland scrambled aircraft to ensure airspace security after Russia launched strikes on Ukraine, while all of Ukraine was reportedly under air raid alerts as the air force warned of Russian missile attacks.
• Russia Foreign Minister Lavrov to visit Iran on Tuesday, according to RIA.

US Event Calendar

• 08:30: Feb. Philadelphia Fed Non-Mfg, prior -9.1
• 09:00: Dec. S&P CS Composite-20 YoY, est. 4.41%, prior 4.33%
  • Dec. S&P/CS 20 City MoM SA, est. 0.40%, prior 0.41%
  • 4Q House Price Purchase Index QoQ, est. 0.3%, prior 0.7%
• 10:00: Feb. Conf. Board Consumer Confidenc, est. 102.5, prior 104.1
  • Feb. Conf. Board Present Situation, prior 134.3
  • Feb. Conf. Board Expectations, prior 83.9
• 10:00: Feb. Richmond Fed Index, est. -3, prior -4
• 10:30: Feb. Dallas Fed Services Activity, prior 7.4

DB's Jim Reid concludes the overnight wrap

Morning from what promises to be a relatively warm and sunny day in Lisbon. Two consequences of Brexit hit me last night. One I had to queue for 75 minutes at immigration with a British passport and secondly when I got to the counter the officer said that he shouldn't let me in as I have no blank spaces left on my passport. He squeezed a stamp on a full page and let me in and warned me to get a replacement immediately. So in my hotel room last night I had to book an emergency passport appointment before a US trip next week. I had no idea the passport was full. It's only been an issue since Brexit as previously no European travel got stamped. To get an appointment though I needed to take a passport photo of myself on my phone in a dimly lit hotel room. 25 attempts later and I finally managed to get one that the online portal approved after balancing a table on my bed, putting the iPhone on it, the camera timer on and running to stand in front of the blank wall. The glamour of work travel.

While I was travelling and taking selfies, US markets tried to recover yesterday but ultimately struggled with the Magnificent 7 (-1.40%) closing at its lowest level since early December, which in turn left the S&P 500 -0.50% lower. Europe managed to again outperform the US, though the STOXX 600 was still down -0.08% even as the DAX (+0.62%) advanced. And with more negative sentiment coming to the fore, US Treasuries rallied across the curve, with the 10yr yield (-3.1bps) closing at a two-month low of 4.40%. This morning its edged lower again to 4.375%.

Those election results from Germany were a key market focus yesterday, as investors reacted to Sunday’s vote. As a reminder, the conservative CDU/CSU are the largest group in the new Bundestag, but the only two-party coalition that can reach a majority are the CDU/CSU and the SPD, given that they’ve refused to cooperate with the AfD. A coalition between the two seemed to be the goal for the CDU/CSU yesterday, with CDU leader Friedrich Merz saying that “I am determined to hold constructive, good, swift talks with the Social Democrats”. That’s a combination Germany has seen frequently in the last couple of decades, with the two governing together for three of Angela Merkel’s four terms, including from 2013-21. However, it’s clear that the SPD’s position as the only party able to provide a majority for the CDU/CSU offers them leverage in any negotiations, and SPD co-leader Lars Klingbeil said that “Whether the SPD enters a government isn’t yet clear”.

In the meantime, there was continued speculation about whether there might be some sort of reform to the debt brake. As it stands, the centrist parties (CDU/CSU, SPD and Greens) are just short of the two-thirds majority required to change the constitution. They could achieve that threshold with the left-wing Die Linke, but they favour lower defence spending and have said they’d only vote for that if investments were made in infrastructure. So there’s theoretically a compromise you could reach where they agree to exempt infrastructure from the debt brake, and that could create more space for defence spending in the core budget. 

Another idea gaining momentum yesterday was that the centrist parties could even reform the debt brake in the current Bundestag, where the different centrist groups already have a two-thirds majority, and Merz said that “The German Bundestag is able to make decisions at any time”, although current finance minister Joerg Kukies said that it would “be a questionable political signal if constitutional amendments were now made with an old majority”. While this debate is in its early stages, our Germany economists argue that markets should start pricing in some probability of meaningful debt-brake reform in the next few weeks. Indeed, Bloomberg reported after Europe went home that Merz has opened talks with the SPD for special defence spending of as much as EUR 200bn before a formal coalition deal is made and before the new legislature sits on March 24th.

In terms of the market reaction, German equities saw a clear outperformance relative to their European counterparts. After a topsy-turvy session, the DAX was +0.62% by the close, having been up more than +1% in the European morning but then briefly falling into the red amid a broader risk-off move early in the US session. There was a stronger performance for the MDAX index of mid-cap stocks, which are more domestically concentrated, but even there the index was up +2.83% before paring that back to close +1.52% higher. Looking at the specifics, expectations for higher defence spending meant that Rheinmetall (+6.40%) was the strongest performer in the DAX again, bringing its YTD advance to +54.80%.

In my CoTD yesterday which went out late due to technical issues I discussed how the election continued a global trend (especially in Europe) where the establishment parties combined hit a record low share of the vote. In Germany support for the CDU/CSU and SPD combined has never been lower at 45.0%, down from 91.2% at the peak in 1976. In the UK election last year the combined vote for Labour and the Conservatives was the lowest in over a century and in the French elections at a similar time we saw support for the far right, far left and centrists broadly equal. We think mainstream parties are suffering due to ever lower economic growth, which along with wider inequality means that an increasing share of the electorate must be, by definition, exposed to negative growth in their world. Concerns over issues like immigration and globalisation are likely symptoms of this rather than the root cause.

Finally on the election, the Euro itself was fairly subdued yesterday, only seeing a modest +0.10% move against the US Dollar. Our FX strategists published an update yesterday after the German election, where they stay euro bearish on balance. However, their conviction on a sub-parity drop for the euro is now lower than it was, mainly because of incoming US fiscal news and the market’s resilience to absorbing tariff announcements without building a risk premium. Nevertheless they also don’t see a breakout higher for EUR/USD given the lack of sufficiently clear positive catalysts from Europe, particularly given the prospect of further ECB easing and persistent tariff risk.

Elsewhere in Europe, there was a lot of focus on Ukraine yesterday, with growing noises that the Ukraine and the US were moving closer to some sort of minerals deal. Ukraine’s Deputy PM Olga Stefanishyna said that “Ukrainian and U.S. teams are in the final stages of negotiations”, with Trump saying later on that “It looks like we’re getting very close” and that Zelenskiy could visit Washington in the next week or two to sign an agreement. Earlier Bloomberg reported that a draft text would see the US commit to a “free, sovereign and secure” Ukraine. Separately, in a meeting with France’s Macron, Trump claimed that Russia’s Putin would accept European peacekeepers in Ukraine. Macron suggested that he and Trump made “substantive steps forward” as he stressed the need for security guarantees for Ukraine, though Trump avoided any direct assurances on this front. So we’ve seen a more constructive tone compared to last week’s concerns that US-Russia talks would leave Ukraine and Europe out in the cold, but the path towards ending Russia’s war in Ukraine is still far from clear.

As mentioned at the top risk assets saw a bit of volatility yesterday. In the US, the S&P 500 (-0.50%) closed beneath 6,000 for the first time since mid-January, extending its -1.71% slump last Friday. This decline came due to a late sell-off that in part followed Trump’s suggestion that the delayed tariffs against Canada and Mexico “are going forward on time, on schedule”. That said, Bloomberg later reported that the fate of the 25% levies was still to be determined. The US equity decline was driven by tech stocks, with the Magnificent 7 down -1.40% ahead of Nvidia (-3.09% yesterday) reporting its results after the US close tomorrow. Bear in mind that the market impact of Nvidia’s results have often proved to be as significant as US jobs reports over the last couple of years, so it’s still a big event on the calendar. There were some news stories over the weekend around Microsoft (-1.03%) cancelling some leases for data centers which raised concerns about excess capex spending.

Otherwise, US Treasuries put in a fresh rally yesterday, as the broader risk-off tone pushed yields lower. Indeed, the 10yr yield (-3.1bps) closed at its lowest since early December, at 4.40%, and the 10yr real yield (-4.2bps) moved back beneath the 2% mark again. That came as investors also dialled up their expectations for Fed rate cuts this year, with the amount priced in by the December meeting up +3.6bps to 50bps.Meanwhile in Europe, 10yr yields were much steadier, with those on 10yr bunds, OATs and BTPs all +0.7bps higher on the day.

Asian equity markets are weaker overnight. There was a Bloomberg report that the Trump administration is seeking further curbs in Chinese investments in strategic sectors including technology, and especially in chips. The move has led to a decline in Chinese technology shares with the Hang Seng dropping more than -1% initially and tech titans including Alibaba and Tencent emerging as the biggest losers. As I check my screens, the Hang Seng (-0.62%) has partially recovered some of its earlier losses with the Shanghai Composite (-0.25%) also recovering. Elsewhere, the KOSPI (-0.49%) and the S&P/ASX 200 (-0.68%) are also trading lower with the Nikkei (-1.10%) leading the declines after reopening following yesterday’s holiday.

In monetary policy action, the Bank of Korea cut interest rates by 25 bps to 2.75%, its lowest since August 2022, as it strives to shore up economic growth amid weak domestic demand and uncertainties at home and abroad. The decision comes as South Korea continues to grapple with political uncertainty over the impeachment trial of President Yoon Suk Yeol.

There was very little other data yesterday, although Germany’s Ifo business climate indicator remained at 85.2 in February (vs. 85.8 expected). The expectations component did pick up to 85.4 (vs. 85.0 expected), but the current assessment reading fell back to 85.0 (vs. 86.3 expected).

To the day ahead now, and US data releases include the Conference Board’s consumer confidence for February, the FHFA’s house price index for December, and the Richmond Fed’s manufacturing index for February. From central banks, we’ll hear from the Fed’s Logan, Barr and Barkin, the ECB’s Nagel and Schnabel, and the BoE’s Pill.