German long-dated bonds experienced a significant sell-off, while the euro reached a four-month high following news that parties negotiating Germany’s new government are considering relaxing fiscal regulations. The shift in fiscal policy outlook has triggered a notable market response, with Germany’s blue-chip index rising by 3.4 percent and the mid-cap index surging 6.2 percent, marking its largest daily gain in almost three years. The proposed changes aim to accommodate increased spending on defense and federal state initiatives, alongside the creation of a substantial €500 billion special fund dedicated to infrastructure improvements.
Construction and defense-related stocks saw considerable gains, reflecting investor optimism about the potential impact of the new fiscal measures. Cement maker Heidelberg Materials rose 17.5 percent, while construction group Hochtief advanced 15.5 percent. Defence stocks Rheinmetall and Renk increased 7.2 percent and 6.8 percent respectively. Annalisa Piazza, fixed income research analyst at MFS Investment Management, noted, “It’s clearly a big change. The market is pricing in fiscal risk…now clearly needs to emerge also in the European curves.” The proposals from Friedrich Merz’s conservatives and the Social Democrats (SPD) are slated for parliamentary review next week.
