(We've rebranded Morning Bid Asia as Trading Day to offer you

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By Jamie McGeever

ORLANDO, Florida, March 6 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

Another day of high drama in world markets on Thursday saw an

interest rate decision and guidance from the European Central

Bank, and a widening of this year's U.S.-Europe divergence as

Wall Street sank and German stocks hit new highs.

The ECB cut rates as expected, and President Christine

Lagarde said the bank will be "attentive and vigilant" to the

changing landscape in the wake of Germany's plans to embark on

its biggest spending spree since reunification.

Germany's DAX climbed to a new peak, German bond yields

extended Wednesday's historic gains, and the euro held its gains

as several banks raised their euro zone growth forecasts - a

stark contrast to the deteriorating price action and economic

backdrop on the other side of the Atlantic.

Figures showing historic U.S. layoffs and a record trade

deficit set the early tone, and swirling uncertainty surrounding

Washington's trade policy - despite President Donald Trump

announcing temporary exemptions on some tariffs - ensured Wall

Street's main three indices closed in the red.

Friday's focus is firmly on the U.S., namely January's jobs

data and public remarks by Fed Chair Jerome Powell. Investor

sentiment towards the U.S. economy and markets going into these

two events is downbeat. The longer the gloom persists, the

higher the bar is for lifting it.

Today's Key Market Moves

* Wall Street slides sharply, with the Nasdaq

falling 2.6%

to its lowest close in five months. It is now down 10% from its

December high, putting it back into 'correction' territory.

* Germany's DAX tacks on 1.5% to print a new all-time high,

and

futures are pointing to a 0.5% rise at Friday's open.

* The performance gap between Germany's DAX and the Nasdaq

this

year is a remarkable 25 percentage points - the DAX is up 18%

year-to-date and the Nasdaq is down 7%.

* Chinese tech stocks jump 5% to the highest since December,

2021,

as investors pile into AI shares and welcome new policy support.

* Marvell Technology ( MRVL ) shares tumble 20%, their worst

day in

24 years as in-line revenue forecasts fail to impress investors.

* Sweden's krona cements its place as the best-performing

G10

currency, and is now up almost 10% vs the dollar this year.

Berlin's historic shift redraws euro rate horizon

Germany's plans to go on its biggest public spending spree in 35

years will likely lead to higher long-term borrowing costs

across the euro zone - and that's a good thing.

While the European Central Bank may have proceeded with its

widely flagged 25 basis point cut on Thursday, lowering the

policy rate to 2.5%, the real story in Europe this week is the

sudden and spectacular jump in euro bond yields and massive

shift in expectations for the ECB's terminal rate.

Up until now, Europe's economy was widely viewed as stagnant

and unproductive, reflected in the low yields on German bonds

versus Treasuries, dovish expectations for the ECB's policy

path, and estimates of an ultra-low or even negative long-term

neutral interest rate.

But this all changed in an instant this week.

On Wednesday, news of Berlin's fiscal plans sent Germany's

10-year Bund yield rocketing the most since the euro was

launched in 1999, and, by some estimates, since 1990.

Money markets are moving too. Implied pricing now suggests

the ECB will not cut interest rates much more from here - a

notable shift from market expectations only 48 hours ago.

While talk of 'European exceptionalism' may still be a

stretch, the gap between the euro zone and the U.S. is narrowing

on many fronts, including growth expectations, equity prices,

and, now, interest rates.

This is a good reminder that while bond yields can rise for

bad reasons - worries about widening deficits, burdensome debt

loads, or plain old inflation - they can rise for good reasons,

too.

For Germany this should be stronger growth, greater

investment, increased productivity, and deeper fiscal

coordination across the continent. It's a set of goals analysts

have been urging the bloc to pursue for years. If the euro zone

is successful in achieving them, it will need to get used to

higher borrowing costs - but that's not a bad exchange.

POSITIVE R-STAR?

Policymakers are less nimble than market traders, so the ECB

can be forgiven for cutting rates on Thursday, even as bond

yields across the bloc were spiking.

The central bank noted that policy is becoming "meaningfully

less restrictive," and President Christine Lagarde said

policymakers must be "attentive and vigilant" to the new fiscal

landscape.

This all suggests that the ECB's 'terminal rate' - the

lowest point of the easing cycle still in play - will now be

higher than previously thought. The question is how much higher.

Economists at Nomura have already removed two quarter-point

rate cuts from their ECB outlook and are now forecasting a

terminal rate of 2.25%. They had previously speculated that the

ECB could go as low as 1.50%.

JP Morgan economists reckon a terminal rate below 2.00% is

now unlikely, and that's where euro money markets appear to be

settling as well. This all suggests the ECB is probably close to

the end of its easing cycle, which chimes with a speech by ECB

board member Isabel Schnabel, who argued even before this week's

news that a "pause or halt" to rate cuts may be approaching.

Importantly, it's not just the outlook for nominal ECB rates

that is changing. Estimates of "R-star" - the inflation-adjusted

neutral rate of interest that neither slows nor accelerates

economic activity - will likely rise also. And there's plenty

scope for that.

Several leading models have long indicated that the euro

zone's R-Star is ultra-low or even negative, meaning the

region's economy requires a real interest rate below zero over

the long run.

In light of this week's news, it's safe to say those models

- and many investors' priors - will need to be updated.

What could move markets tomorrow?

* U.S. non-farm payrolls report (January)

* Fed Chair Jerome Powell speaks at University of Chicago

Booth

School of Business

* Fed's John Williams and Michelle Bowman speak

* ECB President Christine Lagarde speaks at event in

Frankfurt

* Germany industrial orders (January)

If you have more time to read today, here are a few articles

I recommend to help you make sense of what happened in markets

today.

1. Kicking the tyres of 'perfect' Wall Street

pricing

2. Trump policies cast chill on Wall Street

dealmaking

3. 'Psychodrama' tariff negotiations frustrate

Mexico and

Canada

4. Lawyers must now be geopolitical analysts

5. Fed's Waller doesn't see need to cut rates this

month

I'd love to hear from you, so please reach out to me with

comments at . You can also follow me at [@ReutersJamie and

@reutersjamie.bsky.social.]

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.

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