By Marc Jones
LONDON (Reuters) – World financial markets remained in a radical readjustment phase on Thursday after U.S. President Donald Trump’s shakeup of the transatlantic relationship spurred a seismic half-a-trillion-euro shift in German defense and infrastructure spending.
The European Central Bank was gearing up to cut its interest rates again in around an hour’s time.
That would normally suck up traders’ attention. But it was just one of a myriad factors in play, with a global bond market selloff still in full swing a day after the 10-year German Bund yield – a major driver of worldwide borrowing costs – saw its biggest rise since the 1990s.
Those Bund yields were up 7 basis points at 2.85%, having gone as high as 2.929% on Wednesday. The euro was resting at a 4-month high versus a deflated dollar while European stocks also took a breather after a 10% rally this year. [.EU]
“The reality is that I still don’t think the enormity of the (German) news has got close to being fully comprehended and digested by global investors yet,” said Deutsche Bank’s Jim Reid, who estimated that Wednesday’s Bund yield spike was the biggest move since German reunification.
“This is a seismic shift of the most epic proportions and perhaps only fast money and nimble investors have responded so far.”
The global implications had been evident overnight.
Japan’s 10-year government bond yield, another key driver of worldwide borrowing costs, had hit a near 16-year high and the U.S. 10-year Treasury note yield was rising again in early U.S. trading despite rising bets on more Federal Reserve rate cuts following recent patchy data there. [JP/]
Focus also remained on the global trade war after 25% U.S. tariffs on imports from Mexico and Canada were imposed on Tuesday along with fresh duties on Chinese goods.
The White House had said on Wednesday that Mexican and Canadian carmakers would be exempted from their countries’ tariffs for one month as long as they complied with existing free trade rules.
That had lifted Asian markets overnight but Wall Street futures pointed to another fall for the S&P 500 index when it resumes. A difficult run of eight falls in the last 10 sessions has left it in the red for the year. [.N]
MSCI’s broadest index of Asia-Pacific shares outside Japan meanwhile had closed up 1.25% and Tokyo’s Nikkei finished 0.8% higher.
China’s blue-chip index rose another 1.4% while Hong Kong’s Hang Seng Index surged over 3%, hitting its highest in three years and cementing a major world market-topping 20% 2025 surge.[.SS]
ECB RESPONSE
The ECB’s expected interest rate cut was looming large at 1315 GMT and now had even more of a spotlight in the wake of the mass rearmament drive in Germany and the rest of Europe.
European leaders were holding an emergency meeting in Brussels on support for Ukraine, after U.S. President Donald Trump’s suspension of military aid to Kyiv this week fanned fears the region can no longer rely on U.S. protection in place since World War Two.
The euro was steady at $1.08, just shy of a four-month peak it had touched in early Asian trading. The single currency is on course for a rise of more than 4% this week, its strongest weekly performance since March 2009.
“This (ECB) meeting could be very interesting given the current context,” said Julien Lafargue, chief market strategist at Barclays Private Bank.
Not only is the bank getting close to the so-called “neutral” level of interest rates following its recent run of cuts, but Christine Lagarde will most certainly be asked about how the ECB intends to respond to the Europe-wide increase in defence spending, Lafargue said.
In commodities, gold prices were fractionally lower at $2,904 per ounce as traders await the U.S. non-farm payrolls report on Friday for cues on the Federal Reserve’s policy path. [GOL/]
Oil prices tried to catch a break after stumbling this week, undermined by a larger than expected jump in U.S. crude stocks, OPEC+ plans to increase output and U.S. tariffs on key oil supplies.
Brent futures were at $69.7 a barrel, hovering close to an over three-year low touched on Wednesday. [O/R]
($1 = 0.9247 euros)
(Reporting by Marc Jones; Editing by Chizu Nomiyama)
