German DAX >3.5% higher and 10-year bund yield rises >20bps

EU mid-market update: German DAX >3.5% higher and 10-year bund yield rises >20bps as debt brake reform sparks life into defense sector; Waiting for US trade announcement hinted by Lutnick.

Notes/observations

- European stocks roared back, fueled by Germany’s CDU/CSU-SPD coalition deal to loosen borrowing rules, targeting defense spending above 1% of GDP and a €500B off-budget infrastructure fund. Defense stocks rallied (Rheinmetall, BAE Systems , Leonardo, Thales ) - while optimism grew after US Commerce Sec Lutnick hinted Trump may soften tariffs on Mexico and Canada. Germany’s DAX led the charge, jumping 3.7% to 23,150, nearing record highs. Banks rose too, but Adidas slumped on weak 2025 guidance. JP Morgan sees a “paradigm shift” in European defense, predicting higher valuations as US support wanes.

- German 10-year Bund yields launched 20bps to 2.65%, a nine-month high and the biggest sell-off since 2020, as markets priced in higher borrowing. UK 10-year gilt yields climbed 11bps to 4.613%, tracking Europe’s shift, with BoE rate cut bets now at 52bps for 2025 amid mixed signals from Deputy Gov Ramsden.

- Euro broke above $1.06, a four-month peak, and the pound hit $1.28, lifted by a softer dollar (DXY at 16-week low) and Europe’s spending plans. Trump’s tariff stance and US economic worries weighed on the greenback.

- After the US close yesterday, Ross Stores acknowledged that sales softened in late January and early February, despite a solid holiday season. However, during the earnings call, management characterized this weakness as transitory, attributing it to weather factors. They noted that by the latter half of February, consumer confidence and store traffic showed signs of recovery.

- Swiss CPI eased to 0.3% YoY but beat forecasts with a 0.6% monthly rise. Spain’s Services PMI hit 56.2, signaling robust growth, while France’s industrial output missed, and Italy’s PMI beat at 53. Eurozone Services PMI slipped to 50.6, hinting at slower expansion.

- Overnight, China’s annual NPC confirmed its familiar targets: ~5% GDP growth, ~2% CPI and a 4% deficit for 2025, backing AI, NEVs, and property. RBNZ Gov Orr’s surprise exit spiked NZ 10-year yields 12bps, kiwi -0.2%. BOJ’s Ueda and Uchida offered no rate clues, JPY steady.

- Asia closed higher with Hang Seng outperforming +2.8%. EU indices +0.8-3.7%. US futures +0.7-1.0%. Gold -0.0%, DXY -0.5%; Commodity: Brent -0.7%, WTI -1.2%; Crypto: BTC +5.6%, ETH +6.8%.

Asia

- China Feb Caixin PMI Services: 51.4 v 50.7e (25th month of expansion).

- Japan Feb Final PMI Services: 53.7 v 53.1 prelim (confirmed 4th month of expansion).

- Australia Feb Final PMI Services: 50.8 v 51.4 prelim (confirmed 13th month of expansion).

- Australia Q4 GDP Q/Q: 0.6% v 0.6%e v 0.3% prior; Y/Y: 1.3% v 1.3%e.

- South Korea Q4 Preliminary GDP (2nd of 3 readings) Q/Q: 0.1% v 0.1% advance; Y/Y: 1.2% v 1.2% advance.

- New Zealand Feb ANZ Commodity Price M/M: 3.0% v 1.8% prior.

- China National Peoples’ Congress (NPC) set its 2025 GDP growth target at ~5.0%" (unchanged from 2024 level) and set CPI target at ~2.0% (compared to ~3.0% in 2024). Targeted 2025 budget deficit at 4.0% of GDP (up from 3.0% of GDP in 2024).

- RBNZ Gov Orr to step down at the end of March (**Note: term was to run until Mar 2028).

Europe

- Germany CDU Party Leader Merz noted that first results had been reached in talks with SPD; Govt planned reform of debt brake to allow for more defense funds; Special €500B fund to be presented next week.

- German Bundesbank noted that its structural deficit would be 1.4% of GDP in new plan as long as debt was <60% of GDP (prior: 0.35%); Debt brake proposal attempted to facilitate investment; Plan might allow for €220B of extra spending through 2030.

- EU Commission Pres Von der Leyen announced the EU would activate 'National Escape Clause' of Stability and Growth Pact to unleash €150B in defense loans; Europe was ready to boost its defense spending. She added that a 'rearm Europe' could mobilize close to €800B in total through EIB, savings and investment union.

- UK Treasury said to inform the OBR of its "major measures" on Wed (Mar 5th) for changes to tax and spend in order to put the public finances back on track to meet Chancellor Reeves's self-imposed rules. Treasury had earmarked several billion pounds in draft spending cuts to welfare and other government departments amid expectations the chancellor's room for maneuver had all but been wiped out.

Americas

- US Commerce Sec Lutnick stated that he believed Trump would meet Mexico and Canada in the middle ground on tariffs; Tariffs compromise announcement would likely come on Wed, Mar 5th. Would see changes on April 2nd with the reciprocal tariffs.

- Trump said to have 'signaled' privately that he was going to 'stick with tariffs' (NYT).

- Pres Trump State of the Union stressed that "America was back!"; reiterated stance that time to start 'using' tariffs with reciprocal tariffs on Apr 2nd. Products not made in the US would be subject to a tariff, in some cases, rather 'large' ones. Reiterated call for Congress to pass tax cuts. Reiterated call to drill for more oil in the US. Reiterated cuts in federal spending would help lower debt and pledged to balance the federal budget.

Energy

- Weekly API Crude Oil Inventories: -1.5M v -0.6M prior.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +1.37% at 560.60, FTSE +0.84% at 8,832.70, DAX +3.69% at 23,152.63, CAC-40 +2.43% at 8,243.46, IBEX-35 +2.42% at 13,341.01, FTSE MIB +2.52% at 38,686.00, SMI +1.12% at 13,151.50, S&P 500 Futures +0.85%].

Market focal points/key themes: European indices open higher across the board and remained upbeat through the early part of the session; potential for tariff relief seen as a catalyst for the rebound after yesterday’s losses; among sectors leading the way higher are materials and industrials; lagging sectors include utilities and telecom; Banco BPM receives approval to acquire Anima Group; focus on US durable goods orders coming out later in the day; earnings expected in the upcoming Americas session include Telecom Italia, Abercrombie & Fitch and Foot Locker.

Equities

- Consumer discretionary: Adidas [ADS.DE] -1.5% (final Q4/FY results, guides FY25).

- Energy: SMA Solar [S92.DE] +19.0% (prelim FY24 results, rev beats).

- Financials: Scor [SCR.FR] -1.0% (Q4 results, profit beats, notes €140M California wildfire impact).

- Healthcare: Bayer [BAYN.DE] +6.5% (Q4/FY results, beats estimates, notes 2025 will be financially difficult, targets €800M savings in pharma unit, FY25 guidance seen bit light, medium term targets), Sandoz [SDZ.CH] +6.5% (FY24 results, revenue misses estimates, raises dividend, guides FY25), Bavarian Nordic [BAVA.DK] +1.5% (final FY24 results, unchanged, affirms guidance).

- Industrials: Dassault Aviation [AM.FR] +4.5% (FY24 results, above estimates, guides FY25; new rally in EU defense names), Evonik [EVK.DE] +9.5% (FY24 results, in line with estimates, guides Q1 EBITDA higher) - Technology: Atos [ATO.FR] +9.0% (earnings).

Speakers

- European Union said to be delaying its roadmap to phase out Russian gas.

- China govt said to seek financing support for major strategic sectors and to expand scale of bond issuance. To optimize financing for tech SME.

Currencies/fixed income

- Trade policy remains squarely in the spotlight. Risk appetite found some tailwinds on reports that a tariffs compromise announcement could come on Wed.

- EUR/USD climbed to a 16-week high as the pair moved above the 1.07 level after Germany relaxed its debt brake to allow higher defense spending and create an off-budget fund of €500B in infrastructure spending. The German announcement coming after EU announced its new plans to increase defense spending that could mobilize as much as €800B. The Euro aided by higher bond yields with the German 10-year Bund opening higher by 20bps to 2.69%. Dealers labeled the German fiscal change a ‘watershed moment’ for interest rates.

- USD/JPY at 149.36 as BOJ officials hinted at more rate hikes but not stressing any immediate urgency to do so.

- Increased spending pledges on defense for Europe sent bond yields another leg higher. The US 10-year German Bund yield at 2.68% (higher by almost 20bps) and 10-year Gilt yield at 4.33%. 10-year Treasury yield at 4.24%.

Economic data

- (RU) Russia Feb Services PMI: 50.5 v 54.6 prior (8th month of expansion); Composite PMI: 50.4 v 54.7 prior.

- (NO) Norway Q4 Current Account (NOK): 211.2B v 208.4B prior.

- (ZA) South Africa Feb PMI (whole economy): 49.0 v 47.4 prior (3rd month of contraction).

- (CH) Swiss Feb CPI M/M: 0.6% v 0.5%e; Y/Y: 0.3% v 0.2%e; Core CPI Y/Y: 0.9% 0.7%e.

- (CH) Swiss Feb CPI EU Harmonized M/M: +0.1% v -0.1% prior; Y/Y: 0.1% v 0.2% prior.

- (SE) Sweden Feb PMI Services: 50.8 v 50.2 prior (5th month of expansion); PMI Composite: 51.5 v 51.0 prior.

- (FR) France Jan Industrial Production M/M: -0.6% v +0.4%e; Y/Y: -1.6% v -0.2%e.

- (FR) France Jan Manufacturing Production M/M: -0.7% v +0.6%e; Y/Y: -2.4% v -2.6% prior.

- (CZ) Czech Feb Preliminary CPI M/M: 0.2% v 0.2%e; Y/Y: 2.7% v 2.7%e.

- (ES) Spain Feb Services PMI: 56.2 v 55.5e (18th month of expansion); Composite PMI: # v 54.8e.

- (TW) Taiwan Feb Foreign Reserves: $577.6B v $577.6B prior.

- (IT) Italy Feb Services PMI: 53.0 v 51.0e (3rd month of expansion); Composite PMI: # v 50.0e.

- (FR) France Feb Final Services PMI: 45.3 v 44.5 prelim (confirmed 7th month of contraction); Composite PMI: 45.1 v 44.5 prelim.

- (DE) Germany Feb Final Services PMI: 51.1 v 52.2 prelim (confirmed 3rd month of expansion); Composite PMI: 50.4 v 51.0 prelim.

- (EU) Euro Zone Feb Final Services PMI: 50.6 v 50.7 prelim (confirmed 3rd month of expansion); Composite PMI: 50.2 v 50.2 prelim.

- (UK) Feb New Car Registrations Y/Y: -1.0% v -2.5% prior.

- (IT) Italy Q4 Final GDP Q/Q: 0.1% v 0.0% prelim; Y/Y: 0.6% v 0.5% prelim.

- (UK) Feb Final Services PMI: 51.0 v 51.1 prelim (confirmed 16th month of expansion); Composite PMI: 50.5 v 50.5 prelim.

- (UK) Feb Official Reserves Changes: $0.7B v $2.1B prior.

- (EU) Euro Zone Jan PPI M/M: 0.8% v +0.3%e; Y/Y: % v 1.3%e.

- (IT) Italy Jan Retail Sales M/M: -0.4% v +0.6% prior; Y/Y: 0.9% v 0.6% prior.

- (ZA) South Africa Q1 BER Business Confidence: 45 v 45 prior.

- (NO) Norway Feb House Price Index M/M: 1.6% v 4.4% prior; Y/Y: 7.6% v 7.3% prior.

Fixed income issuance

- (IN) India sold total INR330B vs. INR330B indicated in 3-month, 6-month and 12-month bills.

- (DE) Germany opened its book to sell EUR-denominated 30-year Bonds; guidance seen +4bps to DBR.

- (DK) Denmark sold total DKK3.025B in 2026 and 2035 DGB bonds.

- UK) DMO sold £4.25B in 4.375% Mar 2030 Gilts Avg Yield: 4.311% v 4.276% prior; bid-to-cover: 3.39x v 3.05x prior; Tail: 0.3bps v 0.5bps prior.

- (SE) Sweden sold SEK7.5B vs. SEK7.5B indicated in 12-month Bills; Avg Yield: 2.1815% v 2.087% prior; Bid-to-cover: 1.88x v 2.39x prior.

- (NO) Norway sold total NOK3.0B vs. NOK3.0B indicated in 2035 and 2039 Bonds.

- (GR) Greece Debt Agency (PDMA) sold €600M vs. €500M indicated in 12-month bills; Avg Yield: 2.15% v 2.27% prior; Bid to cover: 1.87x v 1.59x prior.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 06:00 (IE) Ireland Feb Unemployment Rate: No est v 4.0% prior.

- 06:01 (NZ) New Zealand Feb CoreLogic Home Value M/M: No est v -0.1% prior.

- 06:00 (EU) EU Commission to sell combined €4.5B in 3-month, 6-month and 12-month Bills.

- 06:00 (RU) Russia to sell OFZ Bonds.

- 06:00 (RO) Romania to sell combined RON1.3B in 2028 and 2034 bonds.

- 07:00 (US) MBA Mortgage Applications w/e Feb 28th: No est v -1.2% prior.

- 07:00 (MX) Mexico Dec Gross Fixed Investment M/M: -1.7%e v +0.1% prior; Y/Y: -2.5%e v -0.7% prior; Private Consumption Y/Y: 0.6%e v 0.3% prior.

- 07:00 (MX) Mexico Jan Leading Indicators M/M: No est v -0.13 prior.

- 07:00 (CZ) Czech Central Bank to comment on CPI data.

- 07:00 (UK) Weekly PM Question time in House.

- 08:00 (BR) Brazil Feb Services PMI: No est v 47.6 prior; Composite PMI: No est v 48.2 prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:15 (US) Feb ADP Employment Change: +140Ke v +183K prior.

- 08:30 (CA) Canada Q4 Labor Productivity Q/Q: +0.6%e v -0.4% prior.

- 09:30 (CA) Canada Feb Services PMI: No est v 49.0 prior; Composite PMI: No est v 49.5 prior.

- 09:30 (UK) BOE Gov Bailey with members Pill, Greene and Taylor before Treasury Select Committee.

- 09:45 (US) Feb S&P Final Services PMI: 49.7e v 49.7 prelim; Composite PMI: No est v 50.4 prelim.

- 10:00 (US) Jan Factory Orders: +1.7%e v -0.9% prior; Factory Orders (ex-transportation): No est v 0.3% prior.

- 10:00 (US) Jan Final Durable Goods Orders: 3.1%e v 3.1% prelim; Durables (ex-transportation): 0.0%e v 0.0% prelim; Capital Goods Orders (non-defense/ex-aircraft): No est v 0.8% prelim; Capital Goods Shipments (non-defense/ex-aircraft): No est v -0.3% prelim.

- 10:00 (US) Feb ISM Services Index: 52.5e v 52.8 prior.

- 10:30 (US) Weekly DOE Oil Inventories.

- 11:00 (RU) Russia Jan Unemployment Rate: 2.3%e v 2.3% prior.

- 11:00 (RU) Russia Dec Real Wages Y/Y: 10.5%e v 7.3% prior.

- 11:00 (RU) Russia Jan Real Retail Sales Y/Y: 4.7%e v 5.2% prior.

- 11:30 (US) Treasury to sell 1017-Week Bills.

- 12:00 (BR) Brazil Central Bank Weekly Economists Survey (**Note: moved back during week due to Carnival).

- 12:00 (CA) Canada to sell 2 Year Bonds.

- 14:00 (FR) French Pres Macron.

- (MX) Mexico CitiBanamex Survey of Economists.

- 16:00 (KR) South Korea Feb Foreign Reserves: No est v $411B prior.

- 16:00 (NZ) New Zealand Government 7-Month Financial Statements.

- 16:45 (NZ) New Zealand Q4 Volume of All Buildings Q/Q: No est v -3.2% prior.

- 18:00 (KR) South Korea Feb CPI M/M: 0.4%e v 0.7% prior; Y/Y: 2.1%e v 2.2% prior; CPI (Ex Food and Energy) Y/Y: 1.9%e v 1.9% prior.

- 19:30 (AU) Australia Jan Trade Balance (A$): 5.9Be v 5.1B prior; Exports M/M: No est v 1.1% prior; Imports M/M: No est v 5.9% prior.

- 19:30 (AU) Australia Jan Building Approvals M/M: 0.0%e v 0.7% prior; Private Sector Houses M/M: No est v -3.0% prior.

- 20:00 (PH) Philippines Jan Unemployment Rate: No est v 3.1% prior.

- 21:00 (NZ) New Zealand to sell combined NZ$500M in 2028, 2036 and 2041 bonds.

- 21:05 (VN) Vietnam Feb CPI Y/Y: 3.2%e v 3.6% prior.

- 21:05 (VN) Vietnam Feb Trade Balance: $1.0Be v $3.0B prior; Exports Y/Y: +10.1%e v -4.3% prior; Imports Y/Y: +14.3%e v -2.6% prior.

- 21:05 (VN) Vietnam Feb Industrial Production Y/Y: No est v 0.6% prior.

- 21:05 (VN) Vietnam Feb Retail Sales Y/Y: No est v 9.5% prior.

- 22:30 (JP) Japan to sell 6-Month Bills.

- 22:35 (JP) Japan to sell 30-year JGB Bonds.