Wall Street's epic swoon wipes out Trump bump

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Morning Bid U.S.

What matters in U.S. and global markets today

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

Wall St's withering stock selloff has now wiped out virtually all post-election gains and risks turning into a momentum-driven rout unless there's some change in the darkening economic picture or the uncertain U.S. government trade policy stance.

While watching this jarring picture unfold in U.S. markets, I'm taking a look today at the European defense spending reboot and the extent to which it may seed another round of joint borrowing by European Union countries.

Find this and more on the Wall Street rout below.

I'd love to hear from you, so please reach out to me at mike.dolan@thomsonreuters.com.

Data refreshes every time you open this email. For more U.S. market news, click here. Please send any feedback to morningbid@thomsonreuters.com.

Today's Market Minute

President Donald Trump's tariffs have spooked investors, with fears of an economic downturn driving a stock market sell-off that has wiped out $4 trillion from the S&P 500's peak last month.
A key economic adviser to President Donald Trump on Monday pushed back on talk of recession stemming from uncertainty around his administration's tariff policies, even as a survey of American households showed consumers growing more pessimistic about their prospects.
Germany's Greens vowed to block plans for a massive increase in state borrowing to revamp Germany's military and revive growth, but they also forwarded rival proposals on Monday in a bid for compromise.
Ukraine President Volodymyr Zelenskiy met with Saudi Crown Prince Mohammed bin Salman ahead of talks between Ukrainian and U.S. officials that Washington hopes will deliver substantial progress toward ending Russia's war with Ukraine.
U.S. President Donald Trump aims to build metals refining facilities on Pentagon military bases as part of his plan to boost domestic production of critical minerals and offset China's control of the sector, two senior administration officials told Reuters.

The market's epic swoon

The milestones in the U.S. market reversal piled up on Monday.

The S&P 500's 2.7% plunge marked its worst day of the year, as it closed below its 200-day moving average for the first time since 2023. 'Big Tech' mega caps were battered, and the tech-heavy Nasdaq clocked a 4% loss for the first time since 2022. The VIX 'fear index' of volatility hit its highest point since the yen-inspired explosion last August.

In single stock moves, Tesla's 15% drop stood out. The auto giant has now lost more than 50% of its value since it peaked in December.

Perhaps as worrying as the equity moves was the disturbance in the credit market, with borrowing premia on high-yield U.S. corporate bonds rising to the widest level versus U.S. Treasuries since September.

There was no clear fresh trigger behind Monday's slide apart from ongoing trade tariff uncertainty and the softening jobs market, with President Donald Trump and administration officials acknowledging that an economic downturn was a risk in the first quarter.

The New York Federal Reserve's latest consumer survey highlighted growing concerns about deteriorating household financial situations. And the percentage of those expecting unemployment to be higher a year from now rose to its highest level since September 2023.

Even though the Fed has made it clear that interest rates are on hold for the foreseeable future, a dash for safety in Treasuries saw two year yields hit their lowest point since October, and traders nudged 2025 Fed easing bets up to 85 basis points.

The dollar also slipped again on Tuesday to another 2025 low.

As major investment banks downgraded previously 'overweight' U.S. equity recommendations, anxiety spread around the world. The MSCI's all-country stock index is now negative for the year, too.

However, stock futures and overseas bourses steadied early on Tuesday with small gains.

Let's now take deeper look at some potentially game-changing shifts happening in Europe.

The Dawn of euro defence bonds?

The European Union's latest joint borrowing plan is likely just a fraction of what will be needed to defend the continent, causing some to ask whether the dawn of defence bonds will be the next big expansion of EU-wide borrowing.

For global investors seeking to rebalance their investment portfolios beyond an increasingly isolationist United States, development of a liquid AAA-rated supranational sovereign debt pool in Europe is now intriguing.

Further development of joint EU borrowing beyond the novel post-pandemic "Next Generation" recovery funds - earmarked to be just over 800 billion euros ($866.88 billion) in total - would push the size of this pool far beyond 1 trillion euros, near the scale of domestic government debt heavyweights in Germany, Italy and France.

European leaders last week backed plans to spend more on defence and stand by Ukraine in a world upended by President Donald Trump's reshaping of U.S. military and trade alliances. But the proposed 150 billion euros of jointly borrowed EU loans seemed shy of estimates for what would be needed in common funding.

"Von der Leyen's 150 billion euros in loans are a first step but unlikely to be enough," said Carsten Nickel, deputy research director at advisory firm Teneo, referring to European Commission President Ursula von der Leyen.

Nickel reckons parallel loosening of euro budget rules to allow greater defence spending would only get the continent so far, as military spending would still be competing with other domestic priorities.

What's more, Eastern European countries might baulk at having to shoulder greater defence responsibilities to protect the whole bloc solely due to their proximity to Russia. They might therefore demand joint funding to share the burden.

Joint borrowing could also be the cheaper path. Although benchmark AAA yields on existing 10-year EU-wide debt climbed over the past week to more than 3.1%, the cost of EU-backed funds remains lower than in the majority of the EU, aside from Germany, the Netherlands and the Nordic EU countries.

Graphics are produced by Reuters.

Nuclear umbrella

Intriguingly, Nickel also connects the pressure for shared EU defence spending with France's proposal last week to provide a "nuclear umbrella" for EU security.

"French nuclear protection would likely come at a financial and political cost for its beneficiaries, especially Germany," he wrote. "This could hand (French President Emmanuel) Macron the opportunity to demand joint EU borrowing in return, at the very least for military purposes – a major political win that might also sell well at home."

This move could also provide the new German government the cover it needs to cast aside any remaining objections to joint borrowing. And if the urgency displayed in Berlin last week to up its own defence budget is any indication, another sizeable expansion of joint EU bonds may well be in the works.

Just how much is the only real question.

Read the full column

Today's key chart

Graphics are produced by Reuters.

Even though many investors expected Donald Trump's election win in November to unleash another equity market boom with tax cuts and deregulation, the megacaps that have led market skywards over the past few years have now reversed all their post-election gains. Tesla remains the standout in this regard, losing more than 50% from its December peak.

Today's events to watch

U.S. NFIB February small business survey, January JOLTS job openings
European Union finance ministers meet in Brussels, with European Central Bank Vice President Luis de Guindos attending
U.S. Treasury sells $58 billion of 3-year notes

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