Trump now endorses developments in Treasuries above those in stocks; China is increasing its budget deficit to account for the impact of US tariffs; and even Germany, known for its fiscal conservatism, is poised to increase spending.
The German financial extravagance dominated the headlines yesterday, after claims that incoming Chancellor Merz intends to modify the debt brake to establish a €500 billion ‘special’ military fund, much above the previously speculated €200 billion. President Trump’s assertion that the United States will cease to provide military assistance to Europe has been unequivocally understood.
It is unsurprising that Bunds declined throughout the curve yesterday, with benchmark 10-year yields increasing by as much as 25 basis points, marking the largest intraday surge since just after the collapse of the Berlin Wall, reaching their highest level since 2023. The DAX ascended significantly, increasing by over 3%, with defense stocks predictably spearheading the rally, while the EUR also surged, achieving new year-to-date highs.
Notably, 1-week EUR/USD risk reversals have reached their highest point in four and a half years, indicating a widespread bearish sentiment towards the dollar and a positive response to Germany’s decision to increase fiscal spending. Most traders should practice caution over the prevailing enthusiasm, since the multiplier impact of this expenditure is expected to be quite modest, and it will not serve as a definitive solution to the challenges facing the German economy. It is always difficult to identify market tops or bottoms in such a volatile environment; nevertheless, with the EUR already above its 200-day moving average, momentum suggests a potential for more gains.
Aside from the most significant fiscal development in a decade inside the eurozone, other events occurred yesterday.
Concerns regarding US growth continue, despite the unexpectedly favourable ISM services PMI figures, which increased to 53.5 in February from a previous 52.8. Nonetheless, the survey had a somewhat stagflationary characteristic, as seen by the prices paid index rising to 62.6. The absence of a pronounced market response to the positive surprise was indicative; if the dollar cannot appreciate in response to favorable data, it likely cannot appreciate at all.
The same applies to the equities complex, where anxiety was evident again yesterday, as selling rallies continued to be the favored strategy, despite the upward movement after the suspension of Canada/Mexico car tariffs. Equities persist in confronting a bleak environment, characterized by significant policy uncertainty, inconsistent governmental strategies, and deteriorating economic indicators, hence providing a tactical advantage to the bears.
In this context, it is significant that both Treasury Secretary Bessent and Commerce Secretary Lutnick have been preparing the ground for an economic downturn recently. Bessent, yesterday, flagged that the economy is “lousy” and that incoming figures are currently “Biden data”, trying to absolve Trump of responsibility for the tumble in consumer and business confidence. When both are aggressively talking down their own economy, it signals a doubling-down on the ‘short-term pain, long-term gain’ plan, in turn lowering the prospects of market headwinds lifting in the near future.
Lagarde will announce another 25bp deposit rate drop this afternoon, cutting the deposit rate to 2.50%, while retaining advice that future changes would be ‘data dependent’, with decisions to be done on a ‘meeting by meeting’ basis. The important issue for the ECB will be whether the policy is still described as “restrictive”, with the Governing Council’s hawks, notably the powerful Schnabel, having already voiced questions about such a declaration. Eliminating that description, which does not represent my baseline scenario, would convey an implied hawkish signal, strongly suggesting a deceleration in the pace of future rate decreases.
Meanwhile, the US provides weekly unemployment claims data, albeit neither the initial nor the continuing claims print applies to the survey week for the February NFP print, coming tomorrow. The final Q4 unit labor costs, together with comments from the Fed’s Waller and Harker, may also be noteworthy.
Finally, Broadcom (AVGO) will announce its profits after the market closes today, with the results being critically essential for AI companies, especially after the late January revelation of Deepseek, which has heightened the associated risks dramatically.
