Rates Spark: Markets Cautious in Anticipation of German Spending

Economic

Summary:

The German election results did little to move rates on Monday. However, under geopolitical pressure, politicians are exploring funding options for a military build-up, which validates the market's cautious approach amid looming supply concerns

Increased German spending not immediately obvious from election outcome, but...

The market reaction to the German election outcome was relatively modest. 10y Bund yields tracked towards 2.5%, underperforming modestly versus swaps. In part, this could just be an unwind of the moves on Friday, but overall it also suggests that markets are not ready to dismiss prospects of significantly higher debt issuance ahead.

The election outcome points to a grand CDU/CSU and SPD coalition. But with regards to a possible reform of the debt brake, the more centrist parties CDU/CSU and SPD, along with the Greens, do not hold the necessary two-thirds majority – any reform would also require votes from the Left. The Left has indicated its openness for reform with a view to infrastructure spending but is likely to oppose any changes to support a significant increase in military spending. The AfD has already opposed any change to the debt brake. The future government could also decide to declare an emergency situation around Ukraine to suspend the debt brake temporarily, but it is questionable whether financing a longer-term reoriented defence strategy would pass the constitutional test.

However, the Greens proposed on Monday to reconvene the current parliament to reform the debt brake or decide on special funds to finance the military – the newly elected parliament convenes only on 25 March. The CDU’s Merz has signalled a willingness to engage in talks and a figure of up to €200bn for a special fund has been cited by Bloomberg. Markets will not dismiss the possibility that geopolitical developments and changing realities can still push decision-makers down this route.

Still tight EGB spreads versus Bunds signal high hopes for joint EU borrowing

Common EU issuance to finance military spending is of course also an ongoing discussion, but something that the CDU has been sceptical of as well. Europe is seen moving closer together in light of the rising security threats, but we would argue that at least compared to the outgoing government, such a path has become less straightforward. The FT reported that the UK and EU finance ministers will hold talks at the upcoming G20 meeting this week, with the Polish minister indicating "it could be a fund or a bank".

As such we do have the feeling that markets are too optimistic about the timelines and political/practical hurdles and see the possibility that financing via national debt looks more likely near term which would call tight European Government Bond valuations, especially versus Bunds, into question.

Today's events and market views

The data highlight will be the European Central Bank’s indicator of negotiated wages, of which the last publication still pointed towards a steep 5.4% increase per year. Other ECB indicators, and alternative measures such as the Indeed wage tracker, are already showing more signs of cooling. Markets are therefore likely positioned for a significantly lower reading. Among the US data, we have the Conference Board consumer confidence indices and the Richmond Fed manufacturing index.

The ECB's Schnabel, the Fed's Logan and the BoE's Pill will speak at the Bank of England about the future of central bank balance sheets, which could prove interesting. Later in the day, Barkin from the Fed will speak about inflation.

In terms of supply, we have Spain with an announced syndication of 15y SPGBs for an estimated €7bn. Italy will auction a 2y BTP and an 11y BTPei for a total of €4.25bn and Germany a 28y Green bund for €1.5bn. From the UK we have an 11y Gilt Linker auction for £1.6bn and lastly from the US a new 5y Note for $70bn.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Stocks

Shares sagged Tuesday in Asia as worries over U.S.-China trade friction weighed on the outlook for the region.

Tokyo’s Nikkei 225 lost 1.4% to 38,237.79 after markets in Japan reopened from a holiday on Monday.

In Hong Kong, the Hang Seng gave up 1.5% to 22,999.44, while the Shanghai Composite index dropped 0.8% to 3,346.04.

Australia’s S&P/ASX 200 shed 0.7% to 8,251.90.

South Korea’s Kospi lost 0.7% to 2,630.29 after the Bank of Korea cut its benchmark interest rate to 2.75% from 3%, its third cut in four meetings as it moves to support the slowing economy.

Taiwan’s Taiex fell 1.2% and the Sensex in India gained 0.3%.

Trump said Monday that tariff hikes on imports from America’s neighbors Canada and Mexico will move ahead after a one-month delay. The president has openly antagonized multiple U.S. trading partners recently, threatening to raise tariffs and inviting them to retaliate with import taxes of their own that could send the economy hurtling into a trade war.

Trump has put an additional 10% tariff on Chinese imports due to that country’s role in the production of the opioid fentanyl.

Major companies have warned about uncertainty over U.S. trade policies, while the University of Michigan’s latest consumer sentiment index plunged by roughly 10% over the past month in part due to fears about tariffs and inflation worsening.

On Monday, U.S. stocks drifted lower, compounding their sharp losses from last week.

German stocks ticked higher, and the DAX advanced 0.6% after political conservatives won an election dominated by concerns about Europe’s largest economy.

The S&P 500 dipped 0.5% to 5,983.25 on Monday after flipping between small gains and losses several times through the day. The Dow Jones Industrial Average added 0.1% to 43,461.21, while the Nasdaq composite fell 1.2% to 19,286.92.

Berkshire Hathaway climbed 4.1% for one of the market’s bigger gains after Warren Buffett’s company reported a jumped in operating profits for the latest quarter. But even there, the good news came with a bit of caution.

The owner of Geico, BNSF railroad and other businesses said over the weekend that it’s sitting on a mountain of $334.2 billion in unused cash. Such a large amount could indicate Buffett, who’s famous for buying stocks when prices are low, may not see much worth purchasing in a market that critics say looks too expensive.

Starbucks rose 1.3% after saying it would cut 1,100 corporate jobs and leave several hundred more positions unfilled as new CEO Brian Niccol tries to make it a leaner operation.

Big U.S. companies have broadly been reporting better profits for the last three months of 2024 than analysts expected, which is one of the main reasons the S&P 500 set a record before sliding at the end of last week.

On Wednesday, Nvidia, the company that’s become one of Wall Street’s most influential stocks because of what had been nearly insatiable demand for its chips, will make its first profit report since a China’s DeepSeek upended the artificial-intelligence industry by saying it developed a large language model that can compete with big U.S. rivals without having to use the most advanced and expensive chips.

That called into question all the spending Wall Street had assumed will be required for the ecosystem that’s built around the AI boom, including electricity to power large data centers.

Nvidia’s stock lost 3.1% and was the heaviest single weight on the S&P 500.

This week will also feature updates on consumer confidence and inflation, topics leading Wall Street’s agenda following last week’s slump.

In other dealings early Tuesday, U.S. benchmark crude oil gained 20 cents to $70.90 per barrel in electronic trading on the New York Mercantile Exchange.

Brent crude, the international standard, climbed 41 cents to $74.46 per barrel.

The dollar fell to 149.37 Japanese yen from 149.71 yen. The euro was unchanged at $1.0468.

Source: AP

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Glendon

Economic

Forex

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against its six major peers, edges lower after registering gains in the previous two successive sessions, trading around 106.70 during the early European hours on Friday. However, the analysis of the daily chart indicates a potential bullish reversal, with the index moving within a falling wedge pattern.

The 14-day Relative Strength Index (RSI) remains below the 50 level, signaling a strengthening bearish momentum. Additionally, the US Dollar Index is trading below the nine- and 14-day Exponential Moving Averages (EMAs), reinforcing a weakening short-term price trend.

On the downside, the US Dollar Index may navigate the region around the lower boundary of the falling wedge at 105.90. A break below this critical support zone could strengthen the bearish bias, potentially driving the index toward the three-month low of 105.41, last seen on December 6.

The DXY’s key resistance is at the nine-day EMA of 106.89, followed by the 14-day EMA at 107.11, aligning with the lower boundary of the falling wedge pattern. A clear breakout above this crucial resistance zone could drive the index toward the six-week high of 109.80, last reached on February 3.

US Dollar Index: Daily Chart

Source: FXSTREET

To stay updated on all economic events of today, please check out our Economic calendar

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ING

Economic

The Bank of Korea’s rate cut decision was unanimous, but the timing of future moves is uncertain amid turmoil at home and abroad. The GDP outlook for 2025 was revised down to 1.5%, with CPI unchanged at 1.9%.

The Bank of Korea resumed easing as the FX market stabilised amid weak growth concerns

The Bank of Korea lowered short-term rates by 25bp to 2.75%, as expected. The central bank’s rate-cut statement highlighted growing uncertainty from political developments at home and abroad, adding to downside risks and leaving the BoK open to further easing. With inflation seen staying below 2%, the main focus is on supporting growth. However, the pace and extent of easing moves depend on the government’s fiscal policy steps, currency moves and household debt levels.

Looking ahead three months, two out of six BoK members are open to a rate cut. Yet all agree that monetary policy remains on an easing path. We tend to downplay the forward guidance, as it can swing quickly, especially in times of great uncertainty. Also, Governor Rhee noted that the BoK's current assumptions on monetary policy aren’t all that different from the market's view of two to three cuts, including today's, this year. If growth proves slower than the currently expected 1.5%, policy coordination with the government will be needed.

FX market will remain volatile throughout 1H25

On the FX front, the USDKRW recently fell to the 1,430 level. But it’s expected to rise again once tariff risks intensify. One big area of uncertainty is the Constitutional court’s decision on whether to remove President Yoon from office, expected in the next two-to-three weeks. The USDKRW is likely to strengthen, but only briefly.

We figure that President Trump’s tariffs on Korean manufacturers will get tougher once the political situation in Seoul becomes clearer. This could trigger some USDKRW weakness. We expect the USDKRW to peak in the second quarter before stabilising in the second half.

BoK watch

We expect the BoK to ease three more times in 2025, once per quarter, as a lower-than-neutral rate is needed to support growth. This is 25bp lower than the BoK's current assumption and the market consensus. As we learn more about the government’s supplementary budget, we expect both monetary and fiscal policy to be accommodative to maximise the impact.

In terms of growth, we expect GDP to expand 1.3% year on year in 2025, lower than the BoK's forecast of 1.5%. We believe that the accommodative policy will get traction in the second half, though near-term growth will remain sluggish due to ongoing restructuring efforts in the construction sector and weak private consumption. Meanwhile, consumer prices are expected to stay around 2% this year. Due to soft domestic demand, the government is likely to expand its energy support programmes and delay the public service fee hikes.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Stocks

London stocks were set for a steady open on Tuesday following a downbeat session in Asia and a mostly weaker session on Wall Street.

The FTSE 100 was called to open flat at 8,659, having closed unchanged on Monday.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said: "The major US indices traded in the red on Monday, and selloff accelerated into the session end. The S&P500 slipped below the 50-DMA and closed below the 6000 mark. Nasdaq 100 also cleared its own 50-DMA.

"Microsoft fell more than 1% on news that they cancel some leases for US data centre capacity raising concerns that the company could be in an oversupply position - and overestimated demand previously.

"That obviously casts a terrible doubt in AI investors’ minds given that the past two years’ rally is mostly based on the expectation that the demand will explode, and the companies would rather struggle with limited capacity rather than overcapacity. As such, Nvidia took a 3% hit yesterday. The company will report its Q4 earnings tomorrow."

In UK corporate news, consumer goods giant Unilever announced that its chief executive was leaving “by mutual agreement” after just 19 months at the helm.

Hein Schumacher, who became CEO in July 2023 after serving as a board member for one year, is to step down on 1 March and will exit the firm on 31 May. He will be replaced by Fernando Fernandez, who has been the company’s chief financial officer since January 2024.

Medical equipment maker Smith & Nephew posted a sharp jump in full-year profit and revenue, driven by a rebound in its US knee and hip implant unit, which offset continuing headwinds in China.

Revenue jumped 4.7% to $5.8bn, while operating profit surged 54.6% to $657m. The results follow a profit warning after a third-quarter trading update and pressure from shareholders to break up the group.

Unite Group reported a strong financial performance for 2024, with adjusted earnings rising 16% to £213.8m and IFRS profit surging 331% to £441.9m, supported by rental growth of 8.2% and high occupancy rates.

The FTSE 100 student property specialist said it was optimistic about 2025-2026, expecting 4% to 5% rental growth, continued strong demand from students and university partners, and a fully funded £1.05bn development pipeline focused on Russell Group cities.

Strengthening its portfolio through acquisitions, disposals, and sustainability initiatives, Unite also improved its balance sheet, reducing net debt-to-EBITDA to 5.5x and lowering its loan-to-value to 24%.

Source: Sharecast

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Michelle

Economic

Forex

The NZD/USD pair trades in positive territory around 0.5735 during the early European session on Tuesday. The New Zealand Dollar (NZD) strengthens after China’s latest action plan showed it’s trying to boost foreign investment.

Last week, Chinese authorities published an action plan to make it easier for foreign capital to invest in domestic telecommunication and biotechnology industries. The Commerce Ministry emphasized that the action plan would be implemented by the end of 2025 and that details on subsequent supportive measures would come soon. The positive developments surrounding China’s stimulus plans underpin the China-proxy Kiwi as China is a major trading partner to New Zealand.

The stronger-than-expected New Zealand’s Retail Sales might lift the Kiwi. The country’s Retail Sales, a measure of the country’s consumer spending, rose 0.9% QoQ in the fourth quarter (Q4), the strongest gain in three years, compared to the previous reading of 0% (revised from -0.1%), according to Statistics New Zealand on Monday. This reading came in stronger than the 0.6% expected.

On the other hand, the uncertainty and concerns over US President Donald Trump's tariff plans might boost the safe-have flows, benefitting the Greenback. US President Donald Trump said tariffs on Mexico and Canada would proceed as planned.

Source: FXSTREET

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Economic

Most Asian currencies retreated from recent gains on Tuesday, as global tariff worries underpinned the U.S. dollar, while the won held its own after the Bank of Korea (BOK) delivered a much anticipated rate cut to bolster Asia's fourth-largest economy.

Leading the decline, Thailand's baht fell 0.4% and was on track for its worst session in over a week. Taiwanese dollar and the Indian rupee followed suit to retreat 0.2% each, while the Indonesian rupiah gave up 0.3%.

The MSCI index of emerging market currencies (.MIEM00000CUS) ended a three-day rally, falling as much as 0.2% for its biggest intra-day percentage loss in a week.

The dollar index recovered from its lowest level in over two months touched at the start of the week, boosted by safe-haven demand following U.S. President Donald Trump's announcement that tariffs on Mexico and Canada would proceed as planned.

"Announcements about tariffs involving the U.S., China, or Europe could strengthen the dollar further, but uncertainty makes it hard to predict, as the market is bracing for potential negative news, keeping the dollar at high levels," said Jessica Amir, market strategist at Moomoo Australia.

In South Korea, the won remained largely stable after the country's central bank cut its benchmark interest rate by a quarter of a percentage point. The move was widely anticipated to support an economy impacted by political turmoil and the fallout from Trump's tariff policies.

"There are good reasons to expect the central bank to cut rates again over the coming months to support the struggling economy," Gareth Leather, a senior economist with Capital Economics, said.

In Thailand, markets experienced volatility one day before the central bank's policy meeting, where it is expected to keep rates steady in line with its regional counterparts, Indonesia and the Philippines.

Thailand's economy grew at its fastest pace in over two years last quarter, with inflation under control.

Meanwhile, the Trump administration is planning stricter U.S. semiconductor restrictions and urging allies to increase their limitations on China's chip industry, signaling the president's intention to extend measures initiated under Joe Biden to curb China's technological advancement.

A tech-selloff took a toll on regional equity markets, triggered by a significant decline in the Nasdaq and Chinese stocks.

Taiwan stocks TWSE:TAIEX and South Korean stocks , heavily reliant on their U.S. counterparts, shed 1% and 0.4%, respectively.

Indonesian stocks fell by 1.6% while stocks in Malaysia lost 1%.

Philippine stocks declined by 0.8% and Thai stocks dropped by 1.2%, reaching its lowest point since 2020.

HIGHLIGHTS:

Nvidia's H20 chip orders jump as Chinese firms adopt DeepSeek's AI models, sources say

India GDP growth likely rebounded in Oct-Dec on government spending push Asian currencies down a tad as dollar regains footing_1

Source:Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Rates Spark: Markets Cautious in Anticipation of German Spending

Increased German spending not immediately obvious from election outcome, but...