A look at the day ahead in U.S. and global markets from Mike

Dolan

Global investors got a reminder last week that the U.S. economic

expansion is not etched in stone, even Wall Street is priced as

if it was, and German stocks got another shot in the arm on

Monday from weekend election results.

A string of soft readings from the U.S. retail and service

sectors unnerved U.S. stock traders on Friday, with growing

fears the disruption and uncertainty sown by Donald Trump's new

administration are forcing consumers and businesses to draw in

their horns.

The S&P500, Nasdaq and small-cap Russell 2000

plunged 1.7%, 2.2% and 3% respectively - with the Russell

now turning negative for the year. Friday's losses in the S&P500

and Russell were the biggest one-day hits in 2025, with the blue

chip Dow Jones index recording its steepest weekly

decline since October.

With Federal job cuts mounting and government spending being

slashed, along with considerable anxiety about the effect of

planned import tariffs and the impact on available workers from

deportations of migrants, the economic mood seems to have

turned.

After a disappointing Walmart ( WMT ) earnings forecast week

compounded a sizeable January retail sales miss and weak

February business updates ever since, S&P Global's flash polls

for this month showed activity in the dominant U.S. services

sector contracted for the first time in two years.

Adding insult to injury, the University of Michigan's

consumer sentiment index fell to a 15-month low this month even

as inflation expectations ticked higher, and homebuilder

sentiment also hit a five-month low in February.

The return of long-absent slowdown fears sent a frisson of

concern across both stock and bond markets - pulling 10-year

Treasury yields down to near three-week lows at

4.40%.

Stock futures tried to claw back ground before

Monday's bell, edging back up about 0.5%.

Exaggerated by the initially positive euro reaction

to the expected win for German centrist conservatives in the

weekend election and a likely chancellorship for CDU leader

Friedrich Merz, the dollar continued its recent decline first

thing today too and its main index briefly hit a new low

for 2025.

As markets took fright on Friday, they were jumpy about

pretty much anything that smelt of slowdown or recession, with

high-yield credit markets also wobbling.

With chip giant Nvidia ( NVDA ) preparing to release

earnings on Wednesday, there was attention paid to a TD Cowen

research report saying Microsoft ( MSFT ) was cancelling leases

for AI data centers - a trend that has been such a part of the

economic resilience of the past two years.

Anxiety was increased further by reports that Chinese

researchers had discovered a bat coronavirus with similar

features to the one that caused COVID-19 and raised the

possibility that it could spread to humans. Shares in Moderna ( MRNA )

climbed 5.3% on the news.

On top of all that, Berkshire Hathaway ( BRK/A ) on Saturday

reported record annual profits and boosted its cash stake to

$334.2 billion, as Warren Buffett used his annual shareholder

letter to caution Washington to spend money wisely and take care

of those who get the "short straws in life."

In Europe, all the attention was on the German election

fallout and tentative hopes the new parliament will have enough

support to loosen Germany's restrictive "debt brake" and lift

defense spending.

Germany's blue-chip index jumped 0.8%, boosted by

arms makers, while the mid-cap index surged 2.3% and

small caps advanced 1.1%.

Defence stocks Rheinmetall, Hensoldt and

Renk ( RNKGF ) advanced between 3.3% and 4.3% on prospects of

higher military spending by the incoming administration in

Berlin. The European aerospace and defence index rose

0.9%.

Germany's 10-year bond yield, which serves as

the benchmark for the wider euro zone, was last up just 1 basis

point at 2.465%.

Merz vowed on Monday to quickly form a government after

winning a national election but faces tricky coalition talks,

difficult parliamentary maths and the prospect of an obstructive

Bundestag after far-right and far-left parties gained ground.

But Merz also made clear he felt Europe could no longer rely

on the United States for economic or security support.

"I would never have thought that I would have to say

something like this in a TV show but, after Donald Trump's

remarks last week...it is clear that this government does not

care much about the fate of Europe," Merz told German public

broadcaster ARD.

Key developments that should provide more direction to U.S.

markets later on Monday:

* Chicago Federal Reserve January activity index, Dallas Fed

February manufacturing survey

* Federal Reserve

* US corporate earnings: Diamondback Energy ( FANG ), Domino's Pezza

* US Treasury sells $69 billion of 2-year notes

(By Mike Dolan, editing by XXXX

[email protected])