The opinions expressed here are those of the author, a columnist for Reuters.

By Mike Dolan

Morning Bid U.S.

What matters in U.S. and global markets today

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

We've revamped Morning Bid U.S. to offer you more in-depth markets analysis and commentary. Mike Dolan will help you make sense of the key trends shaping markets each day. For more expert analysis, look out for Reuters' new markets and finance commentary platform, coming this spring.

The European Central Bank will almost certainly deliver an interest rate cut today despite the recent surge in euro area government yields, but the central bank may be forced to pause after today as it assesses Germany's extraordinary fiscal reboot.

As the euro EUR= and European shares .STOXXE soar on the trillion euro spending plan, the dollar .DXY continues to sink, falling to its lowest point since November's U.S. election.

Meanwhile, Japan's yen JPY= hit its best level against the greenback since October. Japan's government debt yields have risen to their highest levels since 2008, with the Bank of Japan set to lift its policy rate again this month.

Back on Wall Street, ailing stock indexes stabilized on Wednesday as U.S. service sector business surveys came in fairly positive and President Donald Trump announced that the U.S. was giving autos a one-month reprieve from the tariff increases on Canadian and Mexican imports.

But traders are nervously awaiting the U.S. payrolls report tomorrow, following news that private sector job creation has softened. U.S. stock futures ESc1 are back in the red even as global equity benchmarks .MIWD00000PUS push higher.

Today I'm taking a look at just how anxious Wall Street is getting and whether credit pricing, deal-making and earnings season deep-dives reveal as much angst as equity indexes.

Today's Market Minute

* Trump has delayed his threatened 25% tariffs on auto imports from Mexico and Canada by a month. Pickup trucks might explain why.

* The maker of Jack Daniel's whiskey says Canada pulling U.S. alcohol off the shelves is 'worse than a tariff', as Canadians avoid American goods and even sporting events.

* A historic global trade war, a proposed $1.2 trillion European fiscal bazooka and China emerging as an AI leader are upending global flows of money, possibly marking a turning point for "U.S. exceptionalism".

* EU leaders are expected to agree to ramp up defence spending and reaffirm their support for Ukraine, after Trump's suspension of military aid to Kyiv fuels concerns the EU can no longer rely on U.S. protection.

* And finally, shares in a small European rival to Elon Musk's Starlink satellite operator have soared 600% in four days, following suggestions Ukraine might lose access to the billionaire's system.

Kicking Wall Street's tires

Trouble on Main Street usually means trouble on Wall Street - and not just top-line stock prices.

If a rare U.S. economic downturn is indeed back in the mix, with business bamboozled by trade wars and government disruption, then the full gamut of financial market activity and pricing faces a shake-up.

U.S. equities with 35% valuation premiums to Europe, for example, have already felt some of the heat as tensions have risen and economic models flash red.

But the world of corporate credit - particularly the riskier 'junk bond' universe of sub-investment grade debt - is usually where you'd seek a reality check on recession fears.

While economic worries typically cut Treasury yields and base borrowing costs, speculative high-yield debt is prone to any uptick in recession risk that almost always tallies with higher bankruptcy and default risks for weaker credit.

And there's been some wobble there over recent weeks to mirror the equity fright of the past month.

The options-adjusted risk spread on ICE Bank of America's high-yield U.S. credit index .MERH0A0 over Treasuries has risen almost 40 basis points in just two weeks - from near historic lows to its widest since October at just under 300bp.

To be fair, this remains extraordinarily benign pricing, with default rates for the grouping expected to remain historically low this year at about 2.5%. And at 300bps, the junk spread is still a sliver below the average of the past year and over a percentage point tighter than the five-year average.

But like the equity market itself, it's been largely priced for a serene scenario of no economic downturn whatsoever over the horizon - and may need a rethink if those probabilities at least are now rising again as many suspect.

Morgan Stanley's strategists think the broad investment grade and low grade credit market has held up reasonably well so far over recent weeks but said they were "cautious" about what happens next.

"We are worried this won't persist if our U.S. growth estimates fall further," Andrew Sheets and team told clients. "We look for opportunities to hedge and improve quality."

DEALS STALL

Somewhat counter-intuitively, credit prices have been helped by a stalling of U.S. deals activity this year. Credit risk tends to correlate with ebbs and flows in mergers and acquisitions as the related debt financing goes hand in hand.

But the main reason for the drop in M&A this year is hardly cause for comfort for the underlying credits.

According to Reuters reports, Wall Street executives and investors are running into roadblocks to get deals over the finish line or even to begin exploratory talks - mainly because of the fog over government policy and its impact on the economy.

M&A in the first two months of 2025 was the weakest since the financial crisis with just 1,603 deals signed through February, making it the slowest open by volume since 2009, Dealogic data showed.

Total deals fell more than 19%, while the total value dropped 29% to $249 billion from the first two months of 2024.

Even if you need to brace for 'a little disturbance', as President Donald Trump described it on Tuesday, you could possibly cheer yourself with a readout from the most recent U.S. earnings season. After all, that showed 17% annual profit growth for S&P500 firms through the end of last year.

But this too may be misleading as a measure of overall corporate health and other wider cuts of company updates beyond the blue chips show a far more fragile picture - one not best prepared for a significant bout of trade and macro turbulence.

And it's in here the recently 'perfect' equity and credit pricing looks way off if a sharp slowdown is underway.

FRAGILE UNDER THE SURFACE

Societe Generale's Andrew Lapthorne points out that if you take the wide S&P1500 .SPSUP index and exclude financial stocks but include the biggest 10% of companies that dominate market cap weightings, the picture looks healthy on the surface. Profit growth of 10% shows little reason to fret.

But if you exclude the top 10% of big caps from this ex-financials cut of the index, the remaining 1,000 or so firms in the index on aggregate saw no earnings growth over the past 12 months at all. What's more, their net income and sales growth was actually negative.

Hand-wringing about 'over-concentration' of the U.S. stock market is not new of course. But it becomes more salient if the tide on Big Tech themes like artificial intelligence have hit a high watermark.

And if what's coming down the pike amounts to a macro shock, corporate America and Wall Street has good reason to worry.

Today's key chart

The ECB is likely to cut its main policy rate for the sixth time in eight months on Thursday, just as German government bond yields soar above the existing ECB rate for the first time in two years, electrified by this week's announcement of an extraordinary fiscal stimulus plan. The fiscal splurge may cause the ECB to pause its easing campaign after today as it assesses the implications of the dramatic shift.

Today's events to watch:

• European Central Bank policy decision and press conference from ECB President Christine Lagarde

• Special European Union Council meeting on Ukraine in Brussels

• U.S. January international trade balance, weekly jobless claims, Q4 productivity and labor costs; Canada Jan trade balance

• Federal Reserve Board Governor Christopher Waller, Philadelphia Fed President Patrick Harker and Atlanta Fed chief Raphael Bostic all speak

• U.S. corporate earnings: Broadcom, Hewlett Packard, Costco, Kroger, Cooper

Opinions expressed are those of the author.

(By Mike Dolan; Editing by Anna Szymanski.mike.dolan@thomsonreuters.com)

((mike.dolan@thomsonreuters.com https://reut.rs/3xFdLhlhomsonreuters.com mike.dolan@thomsonreuters.com; +44 207 542 8488; Reuters Messaging: mike.dolan.reuters.com@thomsonreuters.net/))