The recent turbulence in US equities, driven by recession concerns and escalating tariff tensions, has drawn attention to potential policy shifts. Commerce Secretary Lutnick hinted that President Trump might reconsider tariffs imposed on Mexico and Canada, though no such indication was present in his congressional address. Meanwhile, European fiscal strategies are shifting, with Germany proposing a substantial 500-billion-euro spending plan and the EU discussing measures allowing fiscal flexibility worth up to 650 billion euros over four years. These developments triggered a notable sell-off in European bonds, pushing benchmark 10-year yields up by 14-18 basis points. The US dollar is under pressure, weakening against all G10 currencies and nearly all emerging market currencies. While the euro briefly surpassed $1.07 and the British pound traded above $1.2850, US index futures rebounded by 0.6%-0.8% following previous losses.

Asia Pacific Markets

Currency movements and bond yield spreads have played a key role in the Asia Pacific market trends. The US dollar has been trading within a defined range against the offshore yuan (CNH7.22-CNH7.37) and onshore yuan (CNY7.22-CNY7.33). China’s 10-year bond yield has narrowed its gap with US Treasuries from over 315 basis points in January to less than 250 basis points.
Meanwhile, the Japanese yen saw fluctuations as the US dollar struggled to maintain a bottoming pattern. The greenback, after dropping near JPY148, rebounded to JPY149.50 and is now trading within the JPY149.10-JPY150.20 range. Japanese PMI data reflected continuous improvement, though its impact on the markets remains limited, as the Bank of Japan focuses on other economic factors such as inflation trends and wage growth.

European Markets

The European markets have witnessed notable currency and bond movements. The euro, which had previously declined nearly 9.6% from September to early February, has been in a recovery phase, reaching its highest level in almost four months at $1.0720. It met resistance around its 200-day moving average, with further retracement levels projected near $1.08. A significant factor influencing the euro’s rise is the narrowing yield gap between US and German bonds, with the two-year differential at a four-month low of 180 basis points.
The British pound has also demonstrated resilience, climbing to its strongest position since mid-November at $1.2855. Sterling has benefited from its positioning amid US-European tensions, though resistance levels remain around $1.2830. The UK’s manufacturing PMI remains below 50, signaling contraction, whereas the services PMI has stayed above this threshold since October 2023, indicating relative economic stability.

American Markets

The US dollar has faced downward pressure, influenced by recession fears and rising European bond yields. The Dollar Index, which had previously been forming a potential bottom, has now fallen below key technical levels, breaking the 200-day moving average for the first time since November. It has retraced 50% of its October to mid-January rally and is approaching further retracement levels near 104.00. The US economy appears to be cooling, but the extent remains uncertain. Economic indicators such as rising auto sales and PMI readings above 50 suggest that growth concerns might be premature. Key reports, including the ADP private sector jobs estimate and the ISM services index, are being closely monitored. Additionally, fiscal policy uncertainty remains, with a potential government shutdown looming next week. The Federal Reserve’s Beige Book, often referenced by Chair Jerome Powell, could provide further insight into economic conditions and future monetary policy adjustments.