Economic Update: Focus on European Markets
European stock markets displayed resilience during Wednesday’s trading session, driven by optimism surrounding the potential reduction of the 25% tariffs imposed by the U.S. on Canada and Mexico, as well as proposed reforms in Germany aimed at increasing defense and infrastructure spending.
The European Stoxx 600 index climbed by 5.02 points, or 0.91%, to close at 556.09 points. This positive trend followed a sizable downturn in global equities observed on Tuesday, primarily fueled by tariff-related concerns. Notably, the Stoxx Motor Index rebounded by 2.4% after a 6% decline in the previous session, although sectors such as facilities, food, and beverages experienced downward pressure.
The British FTSE 100 index experienced a marginal decline, finishing lower by 3.16 points, or 0.04%, to close at 8,755.84 points.
In contrast, the French CAC 40 index increased by 125.83 points, or 1.56%, closing at 8,173.75 points. Meanwhile, the German DAX index posted a notable gain of 754.22 points, or 3.38%, closing at 23,081.03 points, marking it as the best performer in the region.
Key contributors to these gains included HochTief, a prominent construction firm, which saw its shares rise by 15.5%, and the Kion Group, which surged 20%. Deutsche Bank’s shares increased by 12.4%, and Siemens Energy reported an 8.6% rise. Defense sector stocks also continued their upward trajectory, highlighted by a 2.7% increase in the Stoxx index for Space and Defense.
The conservative coalition in Germany, expected to form the next government alongside the Social Democratic Party after last month’s elections, is looking to amend the constitutional debt regulations. This reform seeks to facilitate an increase in defense spending beyond 1% of GDP.
Friedrich Merz, anticipated to be Germany’s next Chancellor, indicated that the coalition aims to create a dedicated infrastructure fund, projected at €500 billion ($529 billion) over a decade.
Amendments to the existing debt limit framework are deemed essential to alleviate financial constraints that support the sluggish German economy and enhance military expenditures, aligning Germany with its European counterparts. Nonetheless, these proposals remain politically contentious.
Following these developments, the yield on ten-year German bonds rose by 24 basis points to 2.723%, serving as an important benchmark for the eurozone, while two-year bond yields increased by 15 basis points.
The euro strengthened further on Tuesday, gaining 0.84% against the U.S. dollar and reaching its highest level in four months before settling at a 0.77% increase.
Andrew Kiningham, Chief European Economist at Capital Economics, remarked that Germany seems poised to surpass a budget deficit of 3% of GDP in the next two years, instead of maintaining the previously assumed 2.5%. He noted that the announcements reflect Merz’s readiness to make decisive economic moves. However, the additional borrowing necessary to finance higher spending could exert upward pressure on German bond yields.
In a broader context, the implementation of new U.S. tariffs has cast a shadow over global market sentiment, raising fears of inflation and escalation in the ongoing trade conflict. Wall Street faced a two-day downturn, coinciding with the enforcement of a 25% tariff on imports from Canada and Mexico, alongside a 10% tariff on Chinese goods, prompting retaliatory measures from these nations.
Conversely, U.S. stock futures rallied following comments from Commerce Secretary Howard Lottenic, suggesting that President Trump could announce trade agreements with Canada and Mexico as early as Wednesday.