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Germany’s ‘Whatever It Takes’ Moment Powers European Markets

• Merz announces historic plan to fund defense, infrastructure
• Stocks rally, bonds slump as investors assess spending shift

Germany’s extraordinary spending plans are shaking up the region’s markets, powering European equities past US peers this year and reviving the euro from the brink of parity with the dollar.

Chancellor-in-waiting Friedrich Merz said Germany would do “whatever it takes” — a catchphrase made famous by former European Central Bank chief Mario Draghi — to defend the country and amend the constitution to exempt defense and security from limits on fiscal spending.

The move drove up Germany’s benchmark DAX stock index by as much as 3.8% and the prospect of more borrowing sent the country’s bond yields tumbling, both seeing the biggest moves since 2022. The pan-European Stoxx 600 climbed 1.8% to near a record set earlier this week, while traders bet on hefty gains for the euro.

“Big, bold, unexpected — a game changer for the outlook,” said Evelyn Herrmann, Europe economist at Bank of America Corp., adding that it represented a “paradigm shift.”

Making Europe Great

The historic plan, unlocking hundreds of billions of euros for transportation, energy and housing, is a dramatic shift that upends Germany’s controls on government borrowing. It invokes memories of Draghi’s 2012 speech to save the euro, which became a shorthand for policy determination.

Deutsche Bank AG strategist Maximilian Uleer — a long-standing bullish voice on European stocks — said the region was facing its own “Make Europe Great Again” moment — a play on US President Donald Trump’s campaign slogan for America.

Uleer reiterated his overweight stance on European stocks overall, calling the German proposal “above even our positive expectations.”

Stocks geared toward the German economy jumped, with the country’s mid-cap MDAX Index surging as much as 6.9% — the most since March 2020. That was led by construction firms such as Bilfinger SE and Hochtief AG, up 24% and 18% respectively. Defense companies like Rheinmetall AG added to a stellar rally this year, while heavyweights Deutsche Bank and Siemens AG were both up over 8%.

“There’s a very strong dynamic in Germany,” said Frederic Surry, deputy head of equities at BNP Paribas Asset Management, who has reduced his overweight on the US in favor of Europe. “We’re looking at a broadening, notably on midcaps.”

Winning Stocks

European stocks have been among the best performers in the world this year, as investors bet on stimulus and a potential cease-fire in Ukraine. Cheaper valuations have also proved attractive at a time when funds are exiting pricey US equities, overshadowing concerns around a global trade war for now.

The benchmark Stoxx 600 is on course to outperform the S&P 500 by the most in a decade on a quarterly basis, according to data compiled by Bloomberg. Nine of the top 10 best performing stocks this year in the MSCI World Index — the benchmark for the developed world — are now European, data compiled by Bloomberg show. They include defense companies Rheinmetall, Thales SA, Leonardo SpA and Saab AB.

Euro Recovery

The euro climbed nearly 1% to its strongest level since November at over $1.07. Just a month ago, the common currency was a whisker away from parity with the dollar, trading almost at $1.02. This shifting dynamic could potentially reverse a multi-year US dollar rally, according to Julian Weiss, head of global Group-of-10 vanilla FX options trading at Bank of America.

Banks including Goldman Sachs Group Inc. have been abandoning predictions that the euro will slide to be worth the same as one greenback. Instead, some hedge funds are now buying options wagering the euro will climb another 12% to $1.20 in six to nine months, according to traders familiar with the transactions. “This is Merz’s ‘Draghi moment’,” said Kathleen Brooks, research director at XTB. “The strong recovery in the euro suggests that Europe’s star is rising.”

Europe about to abandon its neoliberal fiscal “balance the budget” rule to invest heavily in military and infrastructure.

Is this the turning point for the European economy?

Meanwhile, Trump appears to have bought into the charlatans who told him that “dollar must weaken” in order to re-industrialize, which will prove fatal if it keeps going. I give it a few months before the US realizes the huge mistake it is in and will likely attempt to pivot by then.