What Happened Last Week
- U.S. Sell-Off: Weak investor sentiment drove the S&P 500 to its third weekly decline, while the NASDAQ 100 entered correction territory.
- European Policy Shift: Germany and the EU proposed massive fiscal spending for defense and infrastructure.
- Historic Market Moves: German 10-year yields rose by their most since German reunification in 1990, a signal that the market is taking fiscal proposals seriously.
What We’re Watching This Week
- Key Data: Market will parse an inflation reading and consumer sentiment for signs of easing inflationary pressures and recovering sentiment.
- European Policy: German fiscal spending and a meeting of EU Defense Ministers and European Central Bank (ECB) delegates are the next steps after last week’s shocking policy announcements.
- Trade and Geopolitics: U.S. steel and aluminum tariff deadline, U.S.-Ukraine talks, and a U.S. funding deadline may exacerbate volatility.
The S&P 500 fell for a third consecutive week, down over ~3%—its worst weekly drop since early September—to close ~6% lower than its mid-February highs. The NASDAQ 100 hit correction territory, down over 10%, as large-cap growth stocks lagged once again. Besides the now routine tariff-related volatility, negative sentiment remains the primary driver of the bearish price action. On Friday, U.S. large caps failed to close below their 200-day moving average after trading significantly through them intraday. While this and other technical indicators suggest oversold conditions and a potential near-term recovery, the S&P 500’s recent six-day streak of 1%+ moves, the longest since 2020, and the weak price action on Monday’s open signal continued volatility ahead.
Existential threats to the EU from the nationalist right and a practically non-existent presence on the world stage forced Europe to take drastic measures last week. Massive defense and infrastructure spending proposals are sending shockwaves through global markets. Germany has pledged to do “whatever it takes” and the EU has floated a gargantuan defense spending increase, partially financed by loans from the EU budget, an unprecedented development. In response, German 10-year yields surged the most since German reunification (1990), the Euro rallied over 4% against the dollar (its largest gain since 2009), and European stocks outperformed U.S. equities by the largest amount since March 2020. We expect sizable cross asset moves to continue as investors process the seismic policy developments out of Europe.
Turning to the week ahead, U.S. investors will digest a critical government funding deadline this Friday, another round of U.S.-Ukraine talks, and a deadline for steel and aluminum tariffs. On the data front, Wednesday’s CPI report is important for the medium-term outlook on Fed policy, while Friday’s consumer confidence reading carries more weight than normal given the degradation in the vibes recently. Europe remains in focus as investors monitor German spending plan talks and any readouts from the EU’s Defense Ministers meeting.
