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US MARKETS

Wall Street is staggering through yet another chaotic session, seesawing between gains and losses as markets try to digest a perfect storm of uncertainty—be it the economy, the Fed’s next move, or Trump’s tariff whiplash. The S&P 500 is barely hanging on to a fragile 0.4% gain in afternoon trading after bouncing between a 0.6% rally and a gut-wrenching 1.3% plunge. It’s shaping up to be the worst week since September, capping off a relentless stretch where the index has whipsawed at least 1% in either direction for six straight sessions.

This wild indecision mirrors the fog surrounding White House economic policy, tariff brinkmanship, and geopolitical flashpoints like Ukraine. But for traders looking for a silver lining, here’s a glimmer: Goldman Sachs’ quant models suggest CTA-driven momentum selling has finally run its course. That means one major source of downward pressure could be fading, offering a momentary reprieve.

Still, let’s not start uncorking the champagne just yet—beneath the surface, turbulence is far from over. The Fed’s reaction function remains a moving target, while Trump’s tariff rollercoaster has corporate America scrambling to recalibrate supply chains, revise earnings outlooks, and pray for some clarity. Meanwhile, Friday’s jobs report landed with an awkward thud: Nonfarm payrolls came in at 151k, weaker than expected but not weak enough to sound the alarm bells. Essentially, it’s a data point stuck in no-man’s land—offering neither clear justification for rate cuts nor any reason for the Fed to hike.

The dollar initially tanked on the print, sending the DXY spiraling to a multi-month low of 103.46 before clawing back to 103.85 near the close. But it’s struggling to break through the all-important 104 handle (markets love round numbers, and so should you). The labor market, with unemployment at 4.1%, is still resilient enough to keep the Fed from slamming the panic button, but that doesn’t mean Powell & Co. aren’t starting to sweat.

Let’s be real—after a string of shaky economic releases, there’s little doubt that some nervous glances are being exchanged behind closed doors at the Fed’s boardroom table. Inflation remains stubborn, growth momentum is slipping, and tariff-induced corporate confusion isn’t helping sentiment. While Powell isn’t ready to slam the gas pedal on rate cuts just yet, the pressure is mounting. If the data continues to underwhelm, the market might force the Fed’s hand before they’re ready to play.

FOREX MARKETS

This week’s market theatrics have only reaffirmed why FX remains the ultimate trader’s playground—volatility, macro divergences, and a flood of capital scrambling for the next big trend. What we’re seeing now is a textbook case of shifting growth narratives, where U.S. economic exceptionalism is getting a reality check, while Europe, of all places, suddenly looks like it's finding a way out of its perpetual doom loop.

Let’s start stateside. The new U.S. administration’s tariff whiplash is throwing corporate America into a supply chain guessing game, shaking confidence, and slowing activity. The equity market wobble and softer U.S. data have been enough to send short-term U.S. swap rates—the ultimate pulse check for dollar sentiment—tumbling 45bps from last month’s peak. Traders are now toying with the idea that the Fed’s terminal rate could slide below 3.50%, but that feels like a stretch. A 151,000 NFP print was weak, but not catastrophic—just enough to keep the market second-guessing itself.

Yet the dollar is clearly feeling the heat. The DXY breaking below 104—once seen as a fortress of support—suggests that the greenback’s grip on safe-haven flows is slipping. If it fails to reclaim that level with conviction, we could be looking at more downside in the near term. That said, traders love a round-number reversal, so if we see a snapback rally, watch for momentum flows to pile back in.

Over in Europe, the script has flipped. Markets have gone from treating the eurozone like an economic backwater to suddenly pricing in a bullish recalibration. A massive German fiscal bazooka—if fully executed—could add 1% to annual GDP growth. The ECB’s easing cycle is now projected to top out at 2.25% instead of the previously expected 1.75%. The shift away from the long-dreaded secular stagnation theme has sent the 10-year EUR swap rate on a trajectory toward 3.50%. Put it all together, and looser fiscal policy paired with tighter monetary conditions has repositioned EUR/USD’s expected range to 1.05-1.10, rather than the 1.00-1.05 zone traders had penciled in just weeks ago.

But here’s where things get interesting—post-NFP price action showed classic exhaustion signals. Short-term fast money and momentum algos struggled to push EUR/USD past 1.0875, hinting that this leg of the trade is running out of steam. That was my cue to peel off the last of my EUR longs. I’ll look to reload closer to 1.07, but I’m keeping my options open. The real showdown next week is whether the massive portfolio re-weighting into the euro continues—or if Trump’s rumored reciprocal tariffs on the EU turn into the next market tantrum, flipping the dollar script yet again.

Beyond the straight-up USD trade, some of the more compelling action is unfolding in Asia, where traders are starting to position for EUR/CNH upside. China’s already on the receiving end of 20% tariffs this year, and if April brings another round of trade escalations, the yuan could stay under pressure. If this dynamic holds, EUR/CNH could rip toward 8.00, with a test of last year’s highs at 8.12 in play. If you’re looking for a sleeper trade with real legs, this one might be worth keeping on the radar heading into Q2.

The easy pips have been banked on the long EUR/USD trade, and now the market’s laser focus shifts to interest rate differentials—meaning the next leg will be dictated by what unfolds on the U.S. side of the economic equation.

With the Fed’s easing cycle possibly coming back into play, traders are recalibrating expectations, but let’s not forget—yield differentials still lean in the dollar’s favor. The real test now is whether upcoming U.S. data validates the recent dovish repricing or forces a swift reset. A stronger-than-expected inflation print or a labor market that refuses to roll over could see rate cut bets pared back, offering the greenback some much-needed support.

But this isn't just a one-way trade. The ECB’s rate path is being rewritten in real-time, with market pricing now dialing back from multiple cuts to potentially just one this year. If that narrative holds, the euro’s downside could be relatively shallow, with 1.0650-1.0700 acting as a strong base. So while rate spreads still favor the dollar, any renewed Fed dovish tilt could quickly shift the momentum back in favor of euro bulls, keeping traders on their toes.

GOLD MARKETS

After methodically scaling into gold last week—buying the dip, stacking up on the breakout above 2875, and doubling down at 2900 (as per last weekend’s trade signal)—the market once again hit a liquidity wall at 2930, failing to generate the kind of momentum needed for a clean breakout. Classic case of rising global yields clipping bullion’s wings, making the opportunity cost of holding non-yielding assets like gold a harder pill to swallow.

But here’s the kicker—China’s PBoC isn’t slowing down. February marked the fourth straight month of gold reserve accumulation, and let’s be real, the PBoC doesn’t dip-buy for giggles. There’s a strategic play unfolding here, and if history is any guide, those gold-bricked trucks are likely still lining up. This steady central bank demand should keep downside risk in check.

That said, after Friday’s NFP print, I peeled off 75% of my speculative long gold futures position—same playbook as EUR/USD—because the post-data fade was a red flag. No follow-through, no conviction. That’s a signal, not noise.

Now, it's all about tactical patience. If we get a washout back to key support levels, I’ll be a willing buyer. Alternatively, if gold finally blasts through 2935 with real volume behind it, I’ll chase the breakout. Until then, I’m sidelined, watching how the dollar sets up on Monday before making my next move. No rush—let the market come to me.

OIL MARKETS

In case you haven’t noticed, President Trump is effectively running the oil market from the sidelines. WTI crude, which surged to $80/bbl in January following Biden’s final sanctions on Russian crude, is now struggling to hold $65 as Trump’s broad-stroke trade war reshapes the global demand-supply equation. With surplus fears mounting, Wall Street's biggest oil shops are revising price calls lower as the market are increasingly vulnerable to downside risk.

OPEC+ just added fuel to the fire, announcing plans to unwind its 2.2 mb/d voluntary production cuts starting April 1—though Russia’s Novak quickly hinted at a potential pause or reversal if prices collapse. This move, initially scheduled for October 2024 but repeatedly delayed due to weak pricing, now appears to align with Trump’s aggressive push for lower energy costs. His remarks at Davos left no room for interpretation: “I’m also going to ask Saudi Arabia and OPEC to bring down the cost of oil.” And if history is any guide, Riyadh listens when Trump speaks.

Meanwhile, the demand outlook is far from reassuring. Trump’s protectionist policies are already rattling global growth, with business and consumer confidence taking hits across major economies. The IEA’s 2025 oil demand growth forecast of +1.1 mb/d is looking increasingly optimistic—particularly with China showing signs of demand fatigue. China’s crude imports dropped 5% y/y in the first two months of 2025, raising fresh concerns that peak oil consumption in the world’s largest importer might already be in the rearview mirror.

So, what’s left to support prices? Outside of an unexpected U-turn from OPEC+, the wildcard remains Trump’s maximum-pressure campaign against Iran. The U.S. Treasury is doubling down on efforts to slash Iranian crude exports from 1.5 mb/d to near zero. Reports suggest the administration is mulling an international blockade to intercept Iranian tankers—a move that would inject fresh geopolitical risk into the mix.

Crude oil is locked in a high-volatility trade with Trump’s policy unpredictability as the primary catalyst. For now, downside risks outweigh the upside, and unless OPEC+ or geopolitics intervene, crude could remain on the back foot.

NUTS & BOLTS

The U.S. economy is still holding its ground, but there’s no denying that the constant tariff whiplash is leaving its mark. Most of the data this week pointed to resilience—both the services and manufacturing ISM stayed in expansion territory, auto sales clocked in at a solid 16.3 million annualized units, and payrolls landed in line with expectations at 151k. However, the full impact of government layoffs has yet to materialize in the numbers, though it's already surfacing elsewhere.

But markets aren’t buying the "everything’s fine" narrative. Growth concerns are creeping in, and corporate America is sounding the alarm. Costco missed earnings, Best Buy flagged inflation passthrough from tariffs, and investors are starting to price in some downside risk. And while we’re not about to jump on the doomsday train with the suddenly-famous Atlanta Fed GDPNow model, it's amusing to see anti-Trump business publications dedicate 20+ articles to it last week—especially when most quants dismiss it as statistical noise.

That said when enough people start paying attention, even a noisy model can move markets. The weighting might be low, but it’s in the mix.

FLIPPING THE TRANSATLANTIC SCRIPT

Financial markets just pulled off a full-blown paradigm shift, flipping the script on the long-running U.S. exceptionalism trade, while Europe—once the market’s favourite punching bag—might have just stumbled into a fiscal gold rush. The euro has ripped over 4% higher against the dollar in a week, while German bund yields have skyrocketed nearly 40bps. If this price action tells us anything, traders are aggressively recalibrating their macro playbook.

But let’s not get ahead of ourselves—markets have a history of overplaying their hand. Just ask ECB President Christine Lagarde, who went from mentioning “uncertainty” four times in January to a staggering seventeen times this week. If that’s not a flashing neon sign, I don’t know what is.

So, what’s fueling this seismic shift, and are traders getting it right?

First off, the big bet is that Germany’s fiscal bazooka—coupled with looser European Commission deficit rules—will force the ECB to rethink its rate-cut trajectory. Traders are dialing back expectations for aggressive easing, and they might have a point. The narrative is shifting toward a potential pause in April, with only one more cut priced in before summer.

On growth, markets are assuming that Europe’s newfound spending spree will act as a game-changer, boosting both short- and long-term economic prospects. The broader takeaway? A structural shift towards fiscal muscle-flexing and an acceptance of higher deficits as the price of security.

The logic checks out—to a degree. Infrastructure spending typically delivers a high multiplier effect, and let’s be honest, Germany desperately needs a facelift if it wants to future-proof its stagnating economy.

But before traders start front-running a European economic renaissance, let’s talk reality. Massive capital investments don’t happen overnight—there’s always bureaucratic sludge to wade through, and “back hoe-ready” projects are rarely as immediate as politicians promise. And let’s not forget that all these grand plans still need to clear Germany’s outgoing parliament without getting bogged down in political infighting.

Military spending, however, is a different beast. A large chunk of the initial spending will likely go toward imported defense equipment—until European manufacturers can ramp up production. What remains unclear is whether this will be offset by cuts elsewhere. The UK’s playbook has been to fund defense by slashing foreign aid. The EU’s deficit rule changes might, in theory, prevent that from happening at scale, but financial markets will still react to ballooning debt issuance, and rising yields can quickly become a drag on growth.

At best, according to some respected economists, all this extra defence spending might add a couple of tenths of a percentage point to eurozone GDP over the next few years. But the real macro catalyst might not be the spending itself—it could be the leverage it provides Europe in trade negotiations with the U.S. If Germany’s spending spree helps de-escalate trade tensions, that could be a far more significant win in the near term, considering that the fiscal stimulus multiplier effect takes time to filter through.

The real question is whether markets are getting ahead of themselves. It’s unclear if European leaders can force member states to buy American defense equipment, even if that’s the expectation. Frankly, they would be crazy not to. Let’s not pretend that the U.S. Treasury is about to let Europe off the hook—tariffs remain a politically expedient revenue stream. Washington has made no secret of its irritation over European trade surpluses.

And speaking of tariffs, if this week’s on-again, off-again Canada/Mexico tariff saga taught us anything, it’s that trying to trade based on policy predictions is a high-stakes game of roulette. But if the trajectory holds, expect Europe to be in Washington’s crosshairs come April. And that—not fiscal stimulus—could be the real story shaping Europe’s economic trajectory this summer. The sheer uncertainty alone is already casting a long shadow over sentiment.

The same applies stateside. A string of wobbly U.S. economic data—highlighted by the Atlanta Fed’s nowcast showing a sharp import-driven drop in Q1 GDP—has traders questioning just how much longer the U.S. can keep flexing its macro dominance. Policy unpredictability isn’t helping, and now rate cut expectations have ratcheted up to three for the year.

Could the market be overcooking the gloom? Possibly. Some argue that Q1 growth won’t be as bad as feared. After all, surging imports ahead of tariffs typically lead to inventory build-up, which eventually filters into consumer spending—both GDP-positive. And a hotter-than-expected inflation print next week could put the brakes on the Fed rate-cut trade.

But zoom out, and the cracks in the U.S. exceptionalism trade are getting harder to ignore. The administration’s focus on cost-cutting and tariffs—both headwinds for growth—has yet to be offset by the tailwind of tax cuts or the promised gains from deregulation. And let’s not ignore this week’s job cuts, which are creeping toward levels last seen during the dot-com bust and the global financial crisis. Not exactly a bullish signal.

The bottom line? This week’s tectonic shifts in transatlantic market dynamics come with major contingencies, lingering unknowns, and plenty of landmines ahead. And for traders, it’s those unresolved variables that will dictate where markets head next.

CHART OF THE WEEK

How much will rising defence spending boost Europe's economy?

GS says, “ Postive but limited impact.”

Europe is about to crack open the fiscal floodgates, and defense spending is leading the charge. According to a Goldman Sachs Research report, European Union defense expenditures are set to balloon by €80 billion by 2027—roughly 0.5% of GDP. While that might not sound like a bazooka in pure economic terms, it’s enough to inject some extra fuel into the euro area’s growth engine.

The real game-changer? Germany’s sudden pivot from austerity enforcer to big spender. The incoming government has essentially rewritten the fiscal rulebook, pledging to exempt defense spending from budget constraints while unlocking a massive €500 billion infrastructure fund. If fully realized, this policy shift could supercharge Germany’s growth trajectory, with ripple effects boosting the broader eurozone economy.

And it’s not just Berlin. EU leaders have also thrown their weight behind a new defense funding initiative, signaling a structural shift towards higher military outlays across the bloc. For markets, this means Europe is no longer the perennial laggard in fiscal stimulus—a fact not lost on traders as the euro continues its bullish run. If the spending spree translates into sustained economic momentum, expect the ECB to recalibrate its easing plans accordingly, keeping rate-cut expectations in check and lending further support to the euro.

• The team estimates that the anticipated higher spending would have a fiscal multiplier of 0.5 over two years, meaning every €100 spent on defense would boost GDP by €50.

• Europe's share of global arms production declined between 2008-2016, although it has since started to pick up again. EU manufacturers have joined the global surge in arms production and are now poised to expand at a faster rate than their US counterparts, according to market pricing.

• Europe bought a substantial amount of military equipment from non-EU suppliers immediately after Ukraine was invaded by Russia. However a large portion of European defense supplies has historically been purchased from domestic companies, particularly in larger EU member states. The average domestic sourcing share was around 90% in France, 80% in Germany, and 70% in Italy between 2005 and 2022.

• To fund defense spending in the near term, Europe will likely rely on a combination of national borrowing and existing EU financing programs, Taddei writes in a separate report, dated March 2. While it will take time to facilitate, the continent is likely to develop a new funding program that issues EU debt specifically for defense and military purposes.

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