Global Markets Weekly Wrap KW 10 : U.S. Stocks Plunge Over 3% Amid Trade Uncertainty and Fed Caution

Global Markets Weekly Wrap KW 10 : U.S. Stocks Plunge Over 3% Amid Trade Uncertainty and Fed Caution 

The U.S. stock market faced a sharp decline, marking its worst performance since early September. Major indexes experienced significant losses, with the S&P 500, Nasdaq Composite, S&P MidCap 400, and Russell 2000 all falling by over 3%, while the Dow Jones Industrial Average dropped 2.37%, erasing much of the gains it had accumulated for the year.

Trade policy uncertainty played a crucial role in the market's downturn. A key deadline arrived, marking the imposition of tariffs previously announced by President Donald Trump. These included a 25% tariff on imports from Canada and Mexico, along with a 10% tariff on goods coming from China. However, later in the week, the administration issued a series of exemptions and temporary delays, including a one-month exemption for goods covered under the U.S.-Mexico-Canada Agreement. Despite these adjustments, the ongoing policy shifts contributed to volatility, negatively impacting investor confidence.

Economic data also influenced market sentiment. The Institute for Supply Management (ISM) released its monthly report on the manufacturing sector, revealing that activity expanded slightly in February, registering a PMI reading of 50.3%. This was a decline from the previous month, reflecting a slowdown. Notably, the new orders component fell into contraction territory, dropping to 48.6%, while prices increased significantly. Conversely, the services sector showed improvement, with the ISM Services PMI climbing to 53.5%, marking eight consecutive months of expansion. Employment in the services sector also grew, reaching its highest level since late 2021. Despite these positive signs, concerns lingered about federal spending cuts and tariffs.

The Federal Reserve released its Beige Book, an economic summary from various regions, which noted slight overall economic growth but also highlighted weaker consumer spending and increased price sensitivity. Tariffs were mentioned frequently, with businesses expressing ongoing uncertainty regarding the long-term effects of new trade policies. Federal Reserve Chair Jerome Powell addressed these concerns, stating that policymakers would take a cautious approach before making any monetary policy adjustments.

The Labor Department's employment report provided mixed signals about the job market. February saw the U.S. economy add 151,000 jobs, which was below expectations but an improvement over January's figures. Health care, financial activities, and transportation sectors saw job growth, while federal government employment saw a decline. The unemployment rate ticked up slightly to 4.1%. Following the report's release, U.S. Treasury bonds initially rallied, though gains were reversed later in the day. Municipal bonds saw negative returns, with interest rate fluctuations contributing to market uncertainty. Meanwhile, high-yield bond investors remained cautious due to tariff concerns, and the energy sector weakened as OPEC announced production increases starting in April.

European markets also felt the pressure from global economic shifts. The STOXX Europe 600 Index ended lower, snapping a ten-week streak of gains. Concerns about U.S. trade policy weighed on investor sentiment, though planned increases in defense and infrastructure spending by Germany and the European Union helped offset some losses. Major European indexes delivered mixed results, with Germany's DAX rising over 2%, while France's CAC 40 made a slight gain, and markets in Italy and the UK posted declines.

The European Central Bank (ECB) took action in response to slowing inflation, cutting its key deposit rate by a quarter of a percentage point to 2.5%. ECB President Christine Lagarde acknowledged the high level of uncertainty in the global economic landscape, citing trade tensions and other risks. As a result, the ECB revised its eurozone growth forecast for 2025 downward, now expecting an expansion of just 0.9%. Inflation projections were also adjusted, with expectations rising slightly to 2.3% for the year. The latest economic data confirmed a slowdown in inflation, with annual rates falling to 2.4% in January from 2.5% in the previous month.

In Germany, political parties in discussions to form a new government reached agreements on significant spending plans. Proposals included a EUR 500 billion infrastructure fund and adjustments to borrowing limits for defense spending. European Union leaders also expressed support for joint military spending, indicating plans to borrow EUR 150 billion for defense initiatives. Following these announcements, German bond yields experienced their largest single-day increase since 1990.

The Bank of England reported a surge in mortgage lending, as buyers rushed to take advantage of an expiring tax break. Lending rose sharply in January, reflecting a last-minute push before changes to the stamp duty took effect.

In Asia, Japan's stock markets delivered mixed results, with the Nikkei 225 declining while the broader TOPIX Index saw gains. Uncertainty over U.S. trade policies influenced global risk sentiment, leading to increased demand for the yen as a safe-haven currency. The yield on Japan's 10-year government bond rose to its highest level since 2008 amid expectations of further interest rate hikes by the Bank of Japan. Officials indicated that the government is preparing to declare an official end to long-term deflation, a significant shift in economic policy. Meanwhile, Japan's largest labor union group sought the largest wage increase in over three decades, a move that could influence the timing of future rate hikes.

Chinese stock markets posted gains, driven by Beijing's announcement of economic growth targets that aligned with forecasts. The government set a 5% growth target for 2025, alongside a fiscal deficit goal of 4% of GDP, the highest in decades. This shift signaled a commitment to stimulus measures to counteract economic headwinds, including trade tensions and a struggling housing market. While the growth target was in line with previous years, analysts remained skeptical about the sustainability of the current pace, given ongoing challenges. The government emphasized consumption as a priority but provided few details on how it would stimulate domestic demand.

Elsewhere, in the Czech Republic, inflation data came in as expected, with annual rates slightly lower than the previous month. The country's bond market was influenced more by developments in Germany, where higher yields and increased spending plans had regional effects. Meanwhile, in Türkiye, the central bank lowered interest rates again, citing continued disinflation. The latest cut brought the one-week repo auction rate down to 42.5%, following recent reductions in response to declining inflation rates.

Market turbulence was a key theme throughout the week, as shifts in U.S. trade policy affected growth expectations and investor sentiment. The S&P 500 saw a sharp decline, while volatility remained elevated. Bitcoin also faced a downturn after President Trump signed an executive order establishing a strategic reserve for digital assets, disappointing market participants.

The euro experienced a strong rally, gaining nearly 5% for the week, marking its best performance since 2009. This was driven by Germany's historic spending package and increased European Union borrowing efforts. German bond yields saw a sharp rise before stabilizing, reflecting investor reactions to fiscal policy changes.

Oil prices declined, with West Texas Intermediate and Brent Crude both falling as U.S. crude inventories increased and OPEC announced production hikes beginning in April. Markets had anticipated a delay in supply increases, but the decision followed political pressure for lower oil prices.

Labor market data from the U.S. indicated moderate job growth, with hiring slowing slightly but remaining positive. The Federal Reserve signaled that further interest rate cuts were unlikely in the near term, as policymakers awaited more progress on inflation.

China's markets rallied, supported by government stimulus measures aimed at counteracting economic headwinds. The country's economic priorities included maintaining stable growth and addressing deflation risks, though questions remained about the effectiveness of policy measures.

On the corporate front, Alibaba saw a surge in its stock price following the launch of a new AI model, while Broadcom projected strong sales growth driven by artificial intelligence computing. In the retail sector, Target warned of ongoing consumer uncertainty, though it expected sentiment to improve with the change of seasons.

Checklist for the Next Two Weeks

Major economic events in the US include: 

Initial Jobless Claims; CPI MoM; CPI YoY; Umich Sentiment; PPI Final Demand MoM; MBA Mortgage Applications; Federal Budget Balance; Continuing Claims 

Major economic events around the world include: 

Japan GDP SA; Germany Industrial Production SA; Brazil Industrial Production; Australia Consumer Confidence; Netherlands CPI