LONDON, April 1 (Reuters) - What matters in U.S. and

global markets today

By Mike Dolan, Editor-At-Large, Financial Industry and Financial

Markets

Monday's small gain in the S&P 500 did little to flatter the

worst quarter since 2022 and even less to deflect investors'

main concern: the still undefined tariff sweep coming from

Washington this week.

I'll explain what else is moving markets this morning and then

discuss how Germany's debt reforms may require reshaping some of

the rules governing the euro.

TODAY'S MARKET MINUTE

* The "Buy Canadian" movement is gathering pace, and more U.S.

companies are saying retailers from supermarkets to convenience

stores are shunning their products, as patriotic consumerism

grows.

* China and Russia are "friends forever, never enemies," Chinese

Foreign Minister Wang Yi said in remarks published on Tuesday

during a visit to Moscow in which he also welcomed signs of

normalising ties between Washington and Moscow.

* Shares in the major drug companies have come under pressure

after reports that the Food and Drug Administration's top

vaccine official has been forced to resign as part of the Trump

administration's overhaul of federal government.

* Japan will keep up a strong push for the U.S. to exempt it

from auto tariffs, according to Prime Minister Shigeru Ishiba.

* The Office of the U.S. Trade Representative has released its

annual report on foreign trade barriers and, at 397 pages, lists

any foreign policies and regulations that it regards as an

issue.

NEW QUARTER, SAME PROBLEMS

U.S. President Donald Trump's administration released on

Monday an encyclopedic list of foreign countries' policies and

regulations it regards as trade barriers. The expectation is

that the full tariff announcement, including "reciprocal

tariffs", will come at 3:00 PM Eastern Time tomorrow.

Countries around the world appear to have given up on

last-minute negotiations, with many preparing retaliatory

measures instead.

In what appeared like an extraordinary development, Chinese

state media yesterday said China, Japan and South Korea are

coordinating a response, though Tokyo and Seoul played that

statement down.

Wall Street investors, having just clocked their worst first

quarter since the pandemic, have little certainty to cling to

apart from the rising probability of a recession.

Goldman Sachs joined JPMorgan in arguing that the chance of

recession in the U.S. over the next 12 months has jumped. They

give it slightly more than a one-in-three chance, a tick below

the 40% chance JPM now sees.

U.S. stock futures were basically flat ahead of

Tuesday's bell, but U.S. equities are once again underperforming

more buoyant world markets, especially in Europe. Negative

technical signals are mounting for the main S&P 500 index, which

hit seven-month lows intraday on Monday before the late

bounce.

U.S. Treasuries also appear to be increasingly worried about

a recession, with three interest rate cuts in 2025 now priced

into futures markets.

Ten-year Treasury yields slipped to their lowest

since March 11 early on Tuesday.

Gold fed off the whole smorgasbord of concerns,

hitting another record at $3,148 per ounce after its best

quarter since 1986.

The dollar appears less sure about which way to lean.

Its DXY index slipped a touch on Tuesday, as the yen

and the euro held firm. China's yuan,

Mexican peso and Canada's dollar, by contrast, all

slipped lower against the greenback.

In Europe, softer-than-forecast core euro zone inflation

readings for March encouraged bets on further easing from the

European Central Bank and lifted regional stocks there

by more than 1%.

The political theatre surrounding Monday's graft conviction for

French far-right leader Marine Le Pen, which bars her from

standing in 2027's Presidential election, played out with little

disturbance in financial markets.

Chinese stocks were less positive earlier though

slightly in the green.

Decent readings from a service sector survey were offset by

news that the U.S. had sanctioned six senior Chinese and Hong

Kong officials, citing "transnational repression" and further

erosion of Hong Kong's autonomy.

Tensions also appeared to rise in regional geopolitics, as China

staged military drills off Taiwan's north, south and east coasts

and called Taiwanese President Lai Ching-te a "parasite". Taiwan

sent warships to respond to China's navy approaching its shores.

Let's now turn back to Europe, where Germany's push for more

spending may force some long-held EU guidelines to be revised.

MAASTRICT GOALPOSTS NEED SHIFTING TO ALLOW GERMANY BOOST

Germany's need to expand its budget could fundamentally

alter EU debt guidelines for the first time since the single

currency was born 26 years ago.

Germany's dramatic decision this year to rush through historic

fiscal reforms to make way for massive spending on defence and

infrastructure has raised questions about just how much of the

stimulus it can deliver without running afoul of EU monitors.

Some economists think the euro zone's long-standing debt/GDP

"reference rate" of 60% could and should be lifted to 90% to

ensure nothing will preclude more German spending, as this

splurge is now seen as necessary to support an entire region

scrambling to defend itself and navigate a rapidly escalating

trade war with the United States.

These economists also argue that boosting long-term growth

prospects is apt to do as much to make higher public debts

sustainable as would adhering to arguably outdated public debt

targets. Even credit rating agencies agreed on that when

assessing the potential impact of Germany's removal of its

self-imposed "debt brake".

Jeromin Zettelmeyer, director at the Brussels-based think

tank Bruegel, last week made the point that Berlin's move should

be sustainable over the coming decade if the increase in debt is

accompanied by an increase in growth potential.

But, even so, German debt/GDP would very likely have to rise

to 100%. And, as it stands, that breaches EU rules.

Germany should be able to boost defence spending and still stay

within bounds, given the exemptions worth 1.5 percentage points

of GDP. But current EU rules would likely prevent it from

spending the 500 billion euros ($540.80 billion) earmarked for

infrastructure - more than half of the near 1 trillion euro

plan.

"To allow higher German spending, the rules may have to

change - for example by setting the 'reference value' for debt

from 60% to 90% of GDP," Zettelmeyer wrote. "The fact that this

would be triggered by a policy change in Germany is unfortunate.

But it would be good for all of Europe."

HOUND TURNED FOX

There is indeed a great irony that a shift of EU budget

goalposts comes at the behest of Germany, the main instigator of

such strict rules back in the late 1990s and the chief enforcer

in the years since.

The euro's founding Maastricht Treaty was signed in 1992,

after which member states set about agreeing on accompanying

budget rules, which eventually made up the so-called Stability

and Growth Pact (SGP) signed in 1997.

The SGP stipulated that member states keep their annual

budget deficits within 3% of annual output, with a view to

keeping overall debt/GDP piles sustainable and targeted towards

a 60% "reference rate".

When the euro launched in 1999, all but two of the 11

nations involved had debt/GDP levels at or under 60%. Italy and

Belgium both had debt/GDP ratios in excess of 100% but were

still allowed to join.

But today, fewer than half of the current 27 euro members

pass this test, with Italy, France, Belgium, Spain, Portugal and

Greece now clocking debt ratios above 100% of national output.

The overall euro debt/GDP share came in at 88% last year,

just below the 90% reference rate now being bandied about.

Annual monitoring of budgets has been relatively strict over

the years, involving formal warnings on primary and structural

balances leading up to actual fines. Exceptions and exemptions

have been proposed and made over the years, and the entire pact

was suspended temporarily in the wake of the pandemic.

But the rules were given extra heft during the post-pandemic

period.

The European Central Bank made compliance with them necessary

for access to its newly-designed Transmission Protection

Instrument, essentially a bond-buying ECB backstop for countries

caught up in market contagion.

If the debt/GDP ratio target were loosened, then it may make

it somewhat easier for more heavily indebted countries to access

ECB supports over time, potentially allowing for some reduction

of borrowing premia as German core rates push higher with its

debt/GDP ratio.

Higher sovereign debt may seem an odd way to make the bloc

more credit-worthy, but it could if it spurs meaningfully higher

growth. And, relatively speaking, the EU still looks less

profligate overall than many of its global peers. The United

States' debt/GDP is running in excess of 120%, Japan's is above

260% and Britain is on course to eclipse 100% as well.

Ultimately, pressing an EU debt brake just when the German

one has been lifted would be self-defeating. Hoisting the

already nebulous debt target to 90%, on the other hand, would

seem to make more sense.

CHART OF THE DAY

Even though the S&P 500 managed to eke out a small gain on

the final session of its worst quarter in three years, the

gradual widening of corporate borrowing premia continued.

Spreads on high-yield U.S. 'junk' bonds hit their widest in

almost eight months on Monday at 355 basis points, with related

high-yield volatility gauges at their highest since early

August. While these spread levels are still far from alarming,

they bear watching in the event of any escalation of U.S.

recession jitters.

TODAY'S EVENTS TO WATCH

* U.S. March manufacturing survey from ISM and S&P Global,

February JOLTS job openings data, February construction

spending, Dallas Federal Reserve March service sector survey

* Richmond Federal Reserve Bank President Thomas Barkin

speaks; European Central Bank President Christine Lagarde and

ECB chief economist Philip Lane both speak; Bank of England

policymaker Megan Greene speaks

Opinions expressed are those of the author. They do not reflect

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