With the worst month for global markets in two years now in the history books, world stocks entered March with shaky knees as global equity markets and US futures are a sea of red this morning, as European shares drop the most since a global rout three weeks ago following sharp declines in the U.S. and Asia ahead of Powell’s second testimony, and amid talk that Trump is ready to announce steep tariffs on steel and aluminum imports.

After attempting a breakout above the unchanged line overnight, S&P 500 Index futures have drifted lower, and the selloff has accelerated in recent minutes, sliding below 2700.

Today's main event for markets will be Fed Chairman Jerome Powell's appearance before the Senate Banking Committee following his comments Tuesday that spurred speculation the U.S. central bank might raise rates four times this year. Chinese purchasing managers’ indexes missed estimates on Wednesday, while President Donald Trump warned the U.S. would use “all available tools” to pressure the nation on trade.

Philip Shaw, chief economist at Investec in London said Powell’s testimony was unlikely to change from the one he delivered on Tuesday, putting the focus on the question and answer session.

“He (Powell) appears to have got an easy ride from lawmakers in the sense that the technical questioning on Tuesday wasn’t too heavy,” Shaw said. “He may not have such an easy time today with the Senate Banking Committee.”

Confirming the risk-off mood, the U.S. dollar rose to six-week highs against G-10 currencies while the gap between short-dated U.S. and German bond yields was at its widest since 1997. MSCI’s all-country equity benchmark fell 0.4% after snapping a record 15-month long winning streak in February, while European stocks lost almost 1 percent

Asian equity markets were hit hard after the S&P 500 and DJIA posted their worst monthly performance in over 2 years. This weighed on the Asia-Pac majors from the open with ASX 200 (-0.7%) led lower by weakness in energy names after similar underperformance of the sector in US due to declines in crude, while Nikkei 225 (-1.6%) suffered broad losses amid a firmer JPY. Chinese bourses outperformed, Hang Seng (+0.7%) and Shanghai Comp. (+0.4%) with pressure somewhat alleviated following better than expected Chinese Caixin Manufacturing PMI data and the resumption of PBoC liquidity operations.

Europe was also hit hard, with the Stoxx 50 down over -1%, as retailers and media companies were among the biggest losers in the Stocks Europe 600 Index as some earnings missed estimates and manufacturing data showed mounting signs growth momentum may have peaked. In terms of sector-specific moves, losses are relatively broad-based with all ten sectors trading with losses; minor underperformance in the IT sector with Dialog Semiconductor paring back some of yesterday’s earnings-inspired gains. Ultimately, this morning’s trade has been one dominated by earnings with notable movers including: Cobham (+11.6%), Peugeot (+6.6%), AB InBev (+5.3%), Eiffage (+2%), WPP (-13.2%), Adecco (-8.5%), Carrefour (-6.5%), Beiersdorf (-3.4%).

"A simultaneous sell-off in equity and bond markets, higher U.S. yields, and concerns of possible outflows continue to buttress USD/Asia,” says Andy Ji, Asian currency strategist at Commonwealth Bank of Australia in Singapore. China’s faltering manufacturing PMI has stoked worries of weaker growth momentum, he says.

Ahead of Powell, Treasury yields fell to a two-week low despite surging earlier in the week on his comments which riled markets earlier this week. . Treasuries began unwinding Wednesday’s strong month-end related buying with 10-year futures edging lower from the open.

In global macro, the Bloomberg Dollar Spot Index rose to a six-week high before Powell’s Senate testimony, and preparations for trade wars as Trump is set to unveil steep tariffs on steel and aluminum imports, hurting EM exporters. Traders will watch for consistency in Powell's message earlier this week on faster pace of tightening. The greenback’s major peers failed to sustain Asia-session gains even as month-end flows that had been supporting the dollar have ended.

The Aussie dollar dropped to a two-month low after disappointing capital expenditure data encouraged leveraged funds to add to short positions. Asia’s emerging currencies fell after a drop in U.S. stocks damped appetite for risk and the dollar kept rising. The region’s sovereign notes were mixed, while most stock markets rose.

Elsewhere, the U.K. pound extended a decline after the European Union published a draft Brexit treaty, squaring off with Prime Minister Theresa May.

Aluminum headed lower with President Donald Trump set to announce steep import tariffs on Thursday. West Texas Intermediate crude retreated for a third day, with oil futures seeing very little in the way of price action during Asia-Pac and European trade following yesterday’s DoE-inspired sell-off with newsflow today otherwise particularly light. In metals markets, spot gold has been unable to benefit from the risk aversion seen in European equity markets as the firmer USD supresses prices and extends on recent losses. Elsewhere, Chinese steel futures were seen higher overnight as the prospects of additional output cuts supports prices, whilst copper prices endured another session of losses despite encouraging Chinese Caixin Manufacturing PMI.

Key events include Powell's comments, Trump's announcement of trade sanctions, the ISM and vehicle data and reports from companies including Nordstrom and Kohl’s

Market Snapshot

• S&P 500 futures down 0.2% at 2,709.25
• STOXX Europe 600 down 0.5% to 377.58
• MXAP down 0.8% to 176.01
• MXAPJ down 0.2% to 576.93
• Nikkei down 1.6% to 21,724.47
• Topix down 1.6% to 1,740.20
• Hang Seng Index up 0.7% to 31,044.25
• Shanghai Composite up 0.4% to 3,273.76
• Sensex down 0.4% to 34,045.30
• Australia S&P/ASX 200 down 0.7% to 5,973.34
• Kospi down 1.2% to 2,427.36
• German 10Y yield fell 1.9 bps to 0.637%
• Euro down 0.06% to $1.2187
• Italian 10Y yield fell 3.0 bps to 1.706%
• Spanish 10Y yield fell 1.4 bps to 1.525%
• Brent Futures down 1.8% to $64.60/bbl
• Gold spot down 0.6% to $1,310.89
• U.S. Dollar Index up 0.1% to 90.73

Bulletin Headline Summary from RanSquawk

• European bourses have followed on from performance in their US and Asia-Pac counterparts (Eurostoxx 50 - 1.1%) to trade lower across the board
• Core bonds are gradually building on earlier positive momentum and advancing further amidst what appears to be heightened risk-off or averse sentiment
• Looking ahead, highlights include US manufacturing PMI, US PCE, US manufacturing ISM and a slew of speakers including Fed’s Powell

Top Overnight News

• Euro-area factory output continues to expand at a robust pace but with mounting signs that growth momentum may have peaked. The manufacturing gauge’s decline since the end of 2017 was the steepest in two years, reinforced by a slowdown in export orders across the region
• U.K. manufacturing lost a bit of steam last month, with growth slipping to an eight-month low
• EU officials were fairly sure the draft Brexit deal they published on Wednesday would be unacceptable to Theresa May. It’s part of their strategy to pressure the British government so that it decides to keep the U.K. as close to the EU as possible, according to three people familiar
• U.S. President Donald Trump is set to announce steep tariffs on steel and aluminum imports Thursday, people familiar with the matter said, in what would be one of his toughest actions yet to implement a hawkish trade agenda that risks antagonizing friends and foes alike
• Fed Chair Jerome Powell, who delivers his second round of semi-annual testimony to Congress on Thursday, told lawmakers on Tuesday the next two years will be “good” ones for the economy. If he’s right, he’ll be at the controls when the current U.S. expansion becomes the longest on record
• China’s rubber-stamp parliament is expected to enact sweeping legislative changes in a two-week session starting Monday that would allow President Xi to rule indefinitely and give him greater control over the levers of money and power

Asian equity markets were mostly lower as the downbeat tone rolled over from the US, where the S&P 500 and DJIA posted their worst monthly performance in over 2 years following the market turmoil seen in early February. This weighed on the Asia-Pac majors from the open with ASX 200 (-0.7%) led lower by weakness in energy names after similar underperformance of the sector in US due to declines in crude, while Nikkei 225 (-1.6%) suffered broad losses amid a firmer JPY. Chinese bourses outperformed, Hang Seng (+0.7%) and Shanghai Comp. (+0.4%) with pressure somewhat alleviated following better than expected Chinese Caixin Manufacturing PMI data and the resumption of PBoC liquidity operations. Finally, 10yr JGBs were subdued with prices contained after yesterday’s reduced-Rinban-induced selling, while a 10yr auction also failed to spur firm demand as the results were mixed with b/c slightly softer and accepted prices higher than prior. Chinese Caixin Manufacturing PMI (Feb) 51.6 vs. Exp. 51.3 (Prev. 51.5). PBoC injected CNY 100bln via 7-day reverse repos, CNY 30bln via 28-day reverse repos & CNY 20bln via 63-day reverse repos.

Top Asian News

• Xi Set to Pass Last Hurdle in Bid for Power to Reshape China
• BOJ’s Kataoka Urges More Stimulus, Says Tightening Long Way Off
• Exxon’s PNG LNG Project Seen Shut for Six Weeks After Quake
• Singapore Freezes World-Leading Ministerial Salaries For Now

European bourses have followed on from performance in their US and Asia-Pac counterparts (Eurostoxx 50 -1.1%) to trade lower across the board. In terms of sector-specific moves, losses are relatively broad-based with all ten sectors trading with losses; minor underperformance in the IT sector with Dialog Semiconductor paring back some of yesterday’s earnings-inspired gains. Ultimately, this morning’s trade has been one dominated by earnings with notable movers including: Cobham (+11.6%), Peugeot (+6.6%), AB InBev (+5.3%), Eiffage (+2%), WPP (-13.2%), Adecco (-8.5%), Carrefour (-6.5%), Beiersdorf (-3.4%).

Top European News

• Euro-Area Factories’ Slowing Pace Seen Hinting at Growth Peak
• U.K. Manufacturing Comes Further Off the Boil Amid Brexit Worry
• Germany Feb. Manufacturing PMI 60.6 vs Flash Reading 60.3
• France Feb. Manufacturing PMI 55.9 vs Flash Reading 56.1
• Italian Jobless Rate Rises as More People Seek Employment

In FX, the DXY has cleared another chart hurdle having climbed above 90.500-600 resistance on Wednesday, and has maintained positive momentum to edge towards the next upside technical objective around 90.886 (Fib level) despite Usd/Jpy and the Jpy, in general, bucking the overall trend (on safe-haven grounds). Eur/Usd is retesting sub-1.2200 bids around 1.2180 ahead of Fib support at 1.2173, and with decent option expiries between 1.2150 and 1.2200 (1 bn and 2 bn respectively) also in the mix. Cable continues to weaken on Brexit-related factors and trending even lower under 1.3750, while Eur/Gbp has breached 0.8850 even though the single currency is relatively soft independently (more long liquidation and political premium ahead of Italian and German votes on Sunday). On that note, Eur/Jpy is hovering just above 130.00 having dipped below overnight, and back on track to hit TOTW profit targets for a couple of major banks. The Aud is underperforming G10 peers again, and heading for a 0.7700 test after significantly weaker than forecast Aussie Capex data. Having breached key support at 0.7759, bears will be eyeing 0.7695, while Nzd/Usd is only just holding above 0.7200. Usd/Cad hovering around 1.2850 ahead of Canadian current account data and

In commodities, WTI and Brent crude futures have seen very little in the way of price action during Asia-Pac and European trade following yesterday’s DoE-inspired sell-off with newsflow today otherwise particularly light. In metals markets, spot gold has been unable to benefit from the risk aversion seen in European equity markets as the firmer USD supresses prices and extends on recent losses. Elsewhere, Chinese steel futures were seen higher overnight as the prospects of additional output cuts supports prices, whilst copper prices endured another session of losses despite encouraging Chinese Caixin Manufacturing PMI. North Sea Buzzard oil field production is still restricted; according to sources

Looking at the day ahead, a range of data will be out, including: January Core PCE, February ISM manufacturing index, personal income and spending, weekly initial jobless claims and continuing claims and total vehicle sales. Onto other events, the Fed’s Powell is back again in front of the US Senate while the US Transportation Secretary Ms. Chao also testifies before the Senate on Trump’s infrastructure plan. The ECB’s Nouy and Lane will also speak. Finally, senior officials from Euro area finance ministries will discuss the banking union and the future role of the ESM.

US Event Calendar

• 8:30am: Personal Income, est. 0.3%, prior 0.4%; Personal Spending, est. 0.2%, prior 0.4%; Real Personal Spending, est. -0.1%, prior 0.3%
• 8:30am: PCE Deflator MoM, est. 0.4%, prior 0.1%; PCE Deflator YoY, est. 1.7%, prior 1.7%;
• 8:30am: PCE Core MoM, est. 0.3%, prior 0.2%; PCE Core YoY, est. 1.5%, prior 1.5%
• 8:30am: Initial Jobless Claims, est. 225,000, prior 222,000; Continuing Claims, est. 1.93m, prior 1.88m
• 9:45am: Bloomberg Consumer Comfort, prior 56.6;
• 9:45am: Markit US Manufacturing PMI, est. 55.9, prior 55.9
• 10am: Construction Spending MoM, est. 0.3%, prior 0.7%
• 10am: ISM Manufacturing, est. 58.7, prior 59.1
• Wards Domestic Vehicle Sales, est. 13.3m, prior 13.1m; Total Vehicle Sales, est. 17.2m, prior 17.1m

DB's Jim Reid concludes the overnight wrap

If you're in Europe I hope your encounters with “The Beast from the East” weather system are going as well as can be expected. London saw some heavy snow yesterday - a rare sight. I was somewhat alarmed to read that meanwhile, the Arctic is seeing a heatwave. Siberia is seeing temperatures 35 degrees C above averages at the moment and Greenland is having some of its hottest days for the time of year on record. There are always exceptions and extremes but I’ve seen a lot of stories suggesting that scientists are worried that global warming is causing this weather shift and that there is some evidence that climate could change more quickly in the future than even the most extreme forecasters have previously suggested. Food for thought.

Talking of which a turbulent February is now behind us and that’s just the markets. At the end today we’ll do our normal performance review but the highlight is that the record 15 month successive positive run for S&P 500 total returns are over. Interestingly yesterday was the fourth successive plus or minus 1% move day (in either direction) for the S&P 500 (-1.11%). February actually had 12 such days after the 13 months from the start of 2017 to January 2018 had just 10. An impressive stat.

Today we’ll see all the usual first of the month PMIs which are as important as ever, especially as its’ been a week of largely disappointing global data. We also have the all-important Fed preferred core US PCE inflation number. We'll preview later but first today sees the fourth part of our series on the impact of rising yields and discusses the rising incidence of zombie firms in recent years (link).

Bottom-up data of some 3,000 companies in the FTSE All-World index show that the percentage of zombie firms more than tripled to 2.0% of firms in 2016 from 0.6% in 1996. That matters because zombie firms are linked to fading business dynamism and because years of low-interest rates should have led to fewer such firms, not more. There are early signs we are at a turning point, however. The numbers for 2017, with two-thirds of firms reporting, suggest that zombie firm incidence declined sharply last year. If this proves to be a real trend, it may give central banks confidence that continuing to raise rates and pull away from unconventional monetary policy will have some advantages. As a recap on Monday, we outlined the macro reasons why yields are rising and why they will continue to (link). On Tuesday we looked at the relationship between yields and credit through history (link) and yesterday the same with equities (link) with lots of trade ideas. So feel free to dip back in.

Onto today, as discussed we have the potentially market sensitive January PCE data. The consensus is for a +0.3% mom core reading and +1.5% yoy reading (which would be unchanged versus December). As a reminder, the big pickup in medical services inflation in the January CPI report and healthcare industries series in the PPI report should read-through positively to today’s PCE. Our US economists also expect a +0.3% mom print. It’s worth also highlighting that Fed Chair Powell will also testify again today (in front of the Senate this time) however its highly unlikely to differ much from Tuesday’s speech so shouldn’t be much of a game changer. This morning we’ve also got the final manufacturing PMIs in Europe which means a first look at the data for the periphery also.

This morning in Asia, markets are broadly lower with the Nikkei (-1.84%) and Hang Seng (-0.40%) both down following the late US sell-off while China’s CSI300 (+0.31%) is up. The Kospi is closed today. Datawise, China’s February Caixin manufacturing PMI was slightly above market at 51.6 (vs. 51.3 expected) while Japan’s 4Q capital spending also beat at 4.3% yoy (vs. 3%) and the final reading of the Nikkei manufacturing PMI was revised up by 0.1 to 54.1. Elsewhere, President Trump has warned China that the US will use “all available tools” to prevent it from undermining global competition.

Risk assets were soft yesterday with European bourses ending lower after a late day sell-off (Stoxx 600 -0.71%) with the S&P 500 reversing earlier gains to close -1.11% with all sectors in the red and losses led by energy and material stocks.

Elsewhere, WTI oil dropped 2.32% following a higher than expected build up in US crude inventories while the VIX rose 7% to 19.85. Yields in Europe fell between 2 and 3bps while 10y Treasuries ended 3.2bps lower – albeit still c2bps above Tuesday’s lows.

Closer to home, Brexit headlines largely dominated the news outlets – at least after the storm stories - as the EU Commission released its draft legal text on the article 50 withdrawal agreement. All of the focus, and to put it simply - the important stuff, concerned Northern Ireland. As a reminder, at the December EU Council meeting, it was the status of Northern Ireland post Brexit which was the main sticking point on agreeing progress on divorce talks between the UK and EU. As DB’s Oliver Harvey notes in a report he published yesterday (link), yesterday’s legal text showed that the EU have made Northern Ireland’s post-Brexit status much more explicit. In the absence of a future free trade agreement or technological solutions that would solve the border issue, Northern Ireland would remain within the EU regulatory and customs area. Oliver thinks that there is little prospect of PM May agreeing to the EU’s current draft text. Indeed May said that no UK prime minister could accept such a deal in the House of Commons yesterday. Indeed aside from the question of the opposition of the DUP, the details could compromise the constitutional integrity of the United Kingdom.

In this sense, May would face a far larger parliamentary rebellion than the 10 DUP MPs. As a reminder, the release of the legal text comes only three weeks before the UK and EU must agree a transitional deal at the March EU Council, in which the UK needs the support of the Irish government. It also comes before May's speech on Friday in which she is due to lay out her vision of a future UK/EU trade relationship, which now appears to be a must watch TV event.

As Oliver rightly says, they have reduced the chance of transitional agreement being reached at the March Council, and increased the risk of an imminent political crisis in the UK. We can't help feel that the EU have seen opposition leader Corbyn's loose support for a customs union and decided to play a game of high stakes given they in theory like this idea. It could be that the unelected officials at the EU force the UK electorate to the polls again soon if a  Northern Ireland solution can't be found. Ex Tory PM Sir John Major didn’t help Mrs. May by saying “the (Brexit referendum) result gave the government the obligation to negotiate a Brexit. But not any Brexit; not at all costs and certainly not on any terms” and that voters have rights to “reconsider” Brexit. Elsewhere, he added, “the only solution that I can see is to join a customs union”.

Unsurprisingly it was Gilts and Sterling that were the relative big movers in markets yesterday. 10 Gilt yields ended the session down 6.1bps at 1.499% and the Pound fell -1.07% versus the USD (most since 5th Feb) and -0.75% versus the Euro (most since Nov. 17).

Before we take a look at today’s calendar, we wrap up with the other data releases from yesterday. In the US, the February Chicago PMI was below market but still solid at 61.9 (vs. 64.6 expected). The January pending home sales fell 4.7% mom (vs. 0.5% expected), partly impacted by higher mortgage rates.

Notably, the annual growth is now -1.7% and the lowest since 2014. Elsewhere, the second reading on the 4Q GDP was revised down by 0.1ppt, but in line with expectations at 2.5% qoq.

The Euro area’s February headline and core CPI were both in line at 1.2% yoy and 1% yoy respectively, while France (1.3% yoy vs. 1.5% expected) and Italy’s CPI (0.7% yoy vs. 1% expected) were below market. Germany’s February unemployment rate was also in line at 5.4% and remained at its post-unification low. Elsewhere, France’s January PPI was 0.9% yoy (vs 1.7% previous) while the second reading of its 4Q GDP was in line at 0.6% qoq, leading to annual growth of 2.5% yoy. The February GfK consumer confidence index for the UK was in line at -10, while the March index for Germany was slightly softer at 10.8 (vs. 10.9 expected).

Looking at the day ahead, the final readings on February manufacturing PMIs across Europe are also due. Elsewhere, the Euro area and Italy January unemployment rate will be out. In the UK, the January net consumer credit lending and mortgage approvals along with the February flash manufacturing PMI and Nationwide House price index are all due. In the US, a range of data will be out, including: January Core PCE, February ISM manufacturing index, personal income and spending, weekly initial jobless claims and continuing claims and total vehicle sales. Onto other events, the Fed’s Powell is back again in front of the US Senate while the US Transportation Secretary Ms. Chao also testifies before the Senate on Trump’s infrastructure plan. The ECB’s Nouy and Lane will also speak. Finally, senior officials from Euro area finance ministries will discuss the banking union and the future role of the ESM.