By Mike Dolan
LONDON (Reuters) – What matters in U.S. and global markets today
By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets
Monday’s small gain in the S&P 500 did little to flatter the worst quarter since 2022 and even less to deflect investors’ main concern: the still undefined tariff sweep coming from Washington this week.
I’ll explain what else is moving markets this morning and then discuss how Germany’s debt reforms may require reshaping some of the rules governing the euro.
TODAY’S MARKET MINUTE
* The “Buy Canadian” movement is gathering pace, and more U.S. companies are saying retailers from supermarkets to convenience stores are shunning their products, as patriotic consumerism grows.
* China and Russia are “friends forever, never enemies,” Chinese Foreign Minister Wang Yi said in remarks published on Tuesday during a visit to Moscow in which he also welcomed signs of normalising ties between Washington and Moscow.
* Shares in the major drug companies have come under pressure after reports that the Food and Drug Administration’s top vaccine official has been forced to resign as part of the Trump administration’s overhaul of federal government.
* Japan will keep up a strong push for the U.S. to exempt it from auto tariffs, according to Prime Minister Shigeru Ishiba.
* The Office of the U.S. Trade Representative has released its annual report on foreign trade barriers and, at 397 pages, lists any foreign policies and regulations that it regards as an issue.
NEW QUARTER, SAME PROBLEMS
U.S. President Donald Trump’s administration released on Monday an encyclopedic list of foreign countries’ policies and regulations it regards as trade barriers. The expectation is that the full tariff announcement, including “reciprocal tariffs”, will come at 3:00 PM Eastern Time tomorrow.
Countries around the world appear to have given up on last-minute negotiations, with many preparing retaliatory measures instead.
In what appeared like an extraordinary development, Chinese state media yesterday said China, Japan and South Korea are coordinating a response, though Tokyo and Seoul played that statement down.
Wall Street investors, having just clocked their worst first quarter since the pandemic, have little certainty to cling to apart from the rising probability of a recession.
Goldman Sachs joined JPMorgan in arguing that the chance of recession in the U.S. over the next 12 months has jumped. They give it slightly more than a one-in-three chance, a tick below the 40% chance JPM now sees.
U.S. stock futures were basically flat ahead of Tuesday’s bell, but U.S. equities are once again underperforming more buoyant world markets, especially in Europe. Negative technical signals are mounting for the main S&P 500 index, which hit seven-month lows intraday on Monday before the late bounce.
U.S. Treasuries also appear to be increasingly worried about a recession, with three interest rate cuts in 2025 now priced into futures markets.
Ten-year Treasury yields slipped to their lowest since March 11 early on Tuesday.
Gold fed off the whole smorgasbord of concerns, hitting another record at $3,148 per ounce after its best quarter since 1986.
The dollar appears less sure about which way to lean.
Its DXY index slipped a touch on Tuesday, as the yen and the euro held firm. China’s yuan, Mexican peso and Canada’s dollar, by contrast, all slipped lower against the greenback.
In Europe, softer-than-forecast core euro zone inflation readings for March encouraged bets on further easing from the European Central Bank and lifted regional stocks there by more than 1%.
The political theatre surrounding Monday’s graft conviction for French far-right leader Marine Le Pen, which bars her from standing in 2027’s Presidential election, played out with little disturbance in financial markets.
Chinese stocks were less positive earlier though slightly in the green.
Decent readings from a service sector survey were offset by news that the U.S. had sanctioned six senior Chinese and Hong Kong officials, citing “transnational repression” and further erosion of Hong Kong’s autonomy.
Tensions also appeared to rise in regional geopolitics, as China staged military drills off Taiwan’s north, south and east coasts and called Taiwanese President Lai Ching-te a “parasite”. Taiwan sent warships to respond to China’s navy approaching its shores.
Let’s now turn back to Europe, where Germany’s push for more spending may force some long-held EU guidelines to be revised.
MAASTRICT GOALPOSTS NEED SHIFTING TO ALLOW GERMANY BOOST
Germany’s need to expand its budget could fundamentally alter EU debt guidelines for the first time since the single currency was born 26 years ago.
Germany’s dramatic decision this year to rush through historic fiscal reforms to make way for massive spending on defence and infrastructure has raised questions about just how much of the stimulus it can deliver without running afoul of EU monitors.
Some economists think the euro zone’s long-standing debt/GDP “reference rate” of 60% could and should be lifted to 90% to ensure nothing will preclude more German spending, as this splurge is now seen as necessary to support an entire region scrambling to defend itself and navigate a rapidly escalating trade war with the United States.
These economists also argue that boosting long-term growth prospects is apt to do as much to make higher public debts sustainable as would adhering to arguably outdated public debt targets. Even credit rating agencies agreed on that when assessing the potential impact of Germany’s removal of its self-imposed “debt brake”.
Jeromin Zettelmeyer, director at the Brussels-based think tank Bruegel, last week made the point that Berlin’s move should be sustainable over the coming decade if the increase in debt is accompanied by an increase in growth potential.
But, even so, German debt/GDP would very likely have to rise to 100%. And, as it stands, that breaches EU rules.
Germany should be able to boost defence spending and still stay within bounds, given the exemptions worth 1.5 percentage points of GDP. But current EU rules would likely prevent it from spending the 500 billion euros ($540.80 billion) earmarked for infrastructure – more than half of the near 1 trillion euro plan.
“To allow higher German spending, the rules may have to change – for example by setting the ‘reference value’ for debt from 60% to 90% of GDP,” Zettelmeyer wrote. “The fact that this would be triggered by a policy change in Germany is unfortunate. But it would be good for all of Europe.”
HOUND TURNED FOX
There is indeed a great irony that a shift of EU budget goalposts comes at the behest of Germany, the main instigator of such strict rules back in the late 1990s and the chief enforcer in the years since.
The euro’s founding Maastricht Treaty was signed in 1992, after which member states set about agreeing on accompanying budget rules, which eventually made up the so-called Stability and Growth Pact (SGP) signed in 1997.
The SGP stipulated that member states keep their annual budget deficits within 3% of annual output, with a view to keeping overall debt/GDP piles sustainable and targeted towards a 60% “reference rate”.
When the euro launched in 1999, all but two of the 11 nations involved had debt/GDP levels at or under 60%. Italy and Belgium both had debt/GDP ratios in excess of 100% but were still allowed to join.
But today, fewer than half of the current 27 euro members pass this test, with Italy, France, Belgium, Spain, Portugal and Greece now clocking debt ratios above 100% of national output.
The overall euro debt/GDP share came in at 88% last year, just below the 90% reference rate now being bandied about.
Annual monitoring of budgets has been relatively strict over the years, involving formal warnings on primary and structural balances leading up to actual fines. Exceptions and exemptions have been proposed and made over the years, and the entire pact was suspended temporarily in the wake of the pandemic.
But the rules were given extra heft during the post-pandemic period.
The European Central Bank made compliance with them necessary for access to its newly-designed Transmission Protection Instrument, essentially a bond-buying ECB backstop for countries caught up in market contagion.
If the debt/GDP ratio target were loosened, then it may make it somewhat easier for more heavily indebted countries to access ECB supports over time, potentially allowing for some reduction of borrowing premia as German core rates push higher with its debt/GDP ratio.
Higher sovereign debt may seem an odd way to make the bloc more credit-worthy, but it could if it spurs meaningfully higher growth. And, relatively speaking, the EU still looks less profligate overall than many of its global peers. The United States’ debt/GDP is running in excess of 120%, Japan’s is above 260% and Britain is on course to eclipse 100% as well.
Ultimately, pressing an EU debt brake just when the German one has been lifted would be self-defeating. Hoisting the already nebulous debt target to 90%, on the other hand, would seem to make more sense.
CHART OF THE DAY
Even though the S&P 500 managed to eke out a small gain on the final session of its worst quarter in three years, the gradual widening of corporate borrowing premia continued. Spreads on high-yield U.S. ‘junk’ bonds hit their widest in almost eight months on Monday at 355 basis points, with related high-yield volatility gauges at their highest since early August. While these spread levels are still far from alarming, they bear watching in the event of any escalation of U.S. recession jitters.
TODAY’S EVENTS TO WATCH
* U.S. March manufacturing survey from ISM and S&P Global, February JOLTS job openings data, February construction spending, Dallas Federal Reserve March service sector survey
* Richmond Federal Reserve Bank President Thomas Barkin speaks; European Central Bank President Christine Lagarde and ECB chief economist Philip Lane both speak; Bank of England policymaker Megan Greene speaks
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Mike Dolan; Editing by Anna Szymanski)
