Monday's small gain in the S&P 500 did little to alleviate investor concerns, particularly regarding the impending and undefined tariff measures from Washington this week.
In today’s market update:
- The "Buy Canadian" movement is gaining momentum, with more U.S. companies reporting that retailers, from supermarkets to convenience stores, are opting to avoid their products. - Chinese Foreign Minister Wang Yi stated that China and Russia are "friends forever, never enemies," during a visit to Moscow where he also expressed welcome sentiments. - Major pharmaceutical companies are facing pressure following reports that the top vaccine official at the Food and Drug Administration has resigned. - Japan continues to advocate strongly for the U.S. to exempt it from auto tariffs. - The Office of the U.S. Trade Representative has published its annual report on foreign trade barriers, detailing numerous policies and regulations it views as impediments to trade.
The release of an extensive list of foreign trade barriers by U.S. President Donald Trump underscores ongoing concerns as the full tariff announcement, including "reciprocal tariffs," is expected tomorrow at 3:00 PM Eastern Time. Countries worldwide appear to be resigning themselves to the situation rather than pursuing last-minute negotiations.
Chinese state media indicated that China, Japan, and South Korea are coordinating a response, although Tokyo and Seoul downplayed the assertion. Wall Street investors, having just experienced their worst first quarter since the pandemic, are clinging to the rising probability of a recession. Analysts at JPMorgan suggest the chance of a U.S. recession within the next 12 months has increased, estimating slightly more than a one-in-three probability.
U.S. stock futures are flat ahead of Tuesday's opening, with American equities underperforming stronger global markets, particularly in Europe. Technical signals for the S&P 500 index are becoming increasingly negative, having fallen to seven-month lows intraday on Monday before a late recovery.
Concerns about a recession are also reflected in U.S. Treasury yields, which are pricing in three interest rate cuts in 2025. Ten-year Treasury yields dropped to their lowest level since March 11 early on Tuesday.
Gold prices surged to a record $3,148 per ounce, benefiting from a range of economic concerns, marking its best quarter since 1986. The dollar's performance was mixed; its DXY index slipped slightly as the yen and euro remained stable, while the Chinese yuan, Mexican peso, and Canadian dollar weakened against the greenback.
In Europe, softer-than-expected core data for March has led to increased speculation regarding further easing from the European Central Bank, boosting regional stocks by over 1%. The political drama surrounding Monday's graft conviction of French far-right leader Marine Le Pen, which disqualifies her from running in the 2027 Presidential election, did not significantly affect financial markets.
Chinese stocks had a less positive start albeit slightly in the green. Data from a service sector survey was overshadowed by news of U.S. sanctions on six senior Chinese and Hong Kong officials, citing "transnational repression" and the erosion of Hong Kong’s autonomy. Tensions appear to be escalating in regional geopolitics, as China conducts military exercises near Taiwan, which has responded by deploying warships.
Looking to Europe, Germany’s push for increased spending may necessitate revisions of long-standing EU guidelines. The need for Germany to expand its budget could fundamentally transform EU debt guidelines for the first time since the euro was introduced 26 years ago.
The urgency behind Germany's decision to accelerate spending on defense and infrastructure has raised questions about the potential impact on EU enforcement. Some economists contend that the eurozone's traditional debt-to-GDP reference rate of 60% should be raised to 90% to facilitate necessary German spending, deemed essential for a region facing substantial challenges amid a trade war with the U.S.
These economists also believe that enhancing long-term growth prospects could make higher public debts more sustainable than adhering to what are now considered outdated debt targets. Credit rating agencies appear to agree with this view when evaluating the implications of Germany abandoning its self-imposed "debt brake."
Experts suggest that the increase in debt should be sustainable over the coming decade if accompanied by growth. However, it is likely that German debt-to-GDP could rise to 100%, exceeding EU guidelines. Germany could increase defense spending without breaching limits, given the moderate GDP impact. Still, current EU regulations may inhibit the country from spending the 500 billion euros ($540.80 billion) allocated for infrastructure, part of a nearly 1 trillion euro package.
To accommodate higher German spending, rule changes might be essential, such as raising the debt reference value from 60% to 90% of GDP, as noted by Zettelmeyer. Ironically, this shift would stem from a country that historically enforced strict budgetary rules.
The Maastricht Treaty that established the euro was signed in 1992, leading to the Stability and Growth Pact (SGP) in 1997, which mandated that member states keep annual budget deficits within 3% of GDP to maintain sustainable debt levels targeting a 60% ratio.
As of today, fewer than half of the 27 eurozone members meet this criterion, with several nations, including Italy, France, Belgium, Spain, Portugal, and Greece, showing debt ratios exceeding 100%. Currently, the eurozone's debt-to-GDP ratio hovers around 88%.
Rigorous annual budget monitoring has been a hallmark over the years, involving formal warnings and potential fines for non-compliance. However, the entire pact was temporarily suspended in response to the pandemic yet strengthened during the post-pandemic recovery.
Loosening the debt-to-GDP target could ease access for heavily indebted countries to ECB support over time, potentially reducing borrowing costs as German rates rise with increased debt. While higher sovereign debt may seem counterintuitive to achieving creditworthiness, if it promotes substantial economic growth, it could benefit the bloc as a whole.
Ultimately, maintaining strict EU debt limits while lifting Germany's own would likely be counterproductive, while adjusting the reference rate to 90% would align with current needs more effectively.
Despite the S&P 500 posting a slight gain at the end of its worst quarter in three years, corporate borrowing costs are still widening. Spreads on high-yield U.S. junk bonds reached their widest levels in nearly eight months, and volatility gauges in this sector are climbing, warranting close monitoring as recession fears loom.
Upcoming releases include the U.S. March manufacturing survey from ISM and S&P Global, job openings data for February, construction spending figures, and the Dallas Federal Reserve’s March service sector survey. Key speeches from various Federal Reserve officials, including President Thomas Barkin and European Central Bank leaders Christine Lagarde and Philip Lane, are also on the agenda.