US LNG exports surge but will buyers in China turn up?
European markets saw a modest rise following the results of the German election, which signaled the potential formation of a two-party coalition between the conservatives and the Social Democrats.
This political shift has alleviated concerns over possible gridlock, though uncertainty remains about the coalition’s ability to implement essential fiscal reforms to revive the German economy.
The euro experienced a fleeting surge to a one-month high, reaching as much as $1.0528 in Asian trading, bolstered by a weaker dollar. However, the momentum waned as European markets commenced, with the euro standing at $1.0482, reflecting a 0.2% increase for the day.
Germany’s DAX index rose by 0.7%, nearing the previous week’s record high, while small- and mid-cap stocks, which are more domestically focused, saw gains of 0.8% and 2% respectively. The broader STOXX 600 index exhibited a modest rise of 0.1%.
Investors reacted to the election results with cautious optimism, as the absence of any major upsets in the election and the continuation of a centrist government could potentially lead to more business and investment-friendly policies. Despite this, yields on German bonds, considered a safe-haven asset, remained unchanged, signaling a degree of lingering uncertainty.
The central concern for the markets is whether the new government will be able to amend the "debt brake," a rule that currently restricts Germany’s structural budget deficit to 0.35% of its output. The economy has suffered two consecutive years of contraction, with critics attributing the downturn to years of underinvestment due to the debt brake.
The conservative Christian Democrats, Social Democrats, and Greens did not secure the two-thirds parliamentary majority necessary to alter the rule, and while the Left Party could provide the needed numbers, it resists increased defense spending, which is anticipated to be a significant component of any fiscal stimulus.
The political landscape suggests that achieving a decisive fiscal regime change will be challenging and will require both political compromises and fiscal ingenuity. The AfD, an opponent of the debt brake reform, performed as expected, and the liberal Free Democrats, who also oppose the reform, did not make it into parliament.
Market expectations had been leaning towards a moderate increase in spending, but recent days have seen a growing anticipation of Europe’s ability to mobilize potentially vast sums to enhance defense spending.
The spread between Germany’s long-term and short-term borrowing costs lingered near its highest point since 2022 on Monday. Any reform to the debt brake could also bolster euro area stocks and the single currency, which had previously dipped to around $1.01 earlier in February amid concerns over U.S. tariff risks.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.