The political climate has shifted dramatically over the past 48 hours, mirroring the rollercoaster of emotions on the Frankfurt stock exchange. Despite high volatility, the upward trend in the DAX remains intact, and the technically derived target of nearly 27,000 points now seems plausible. Levels that appeared unrealistic just 24 hours ago are becoming more tangible with the hundreds of billions of euros set to be injected into Germany’s economic growth.
Bond markets are also receiving the new borrowing plans from the Black-Red coalition favorably, with no significant risk premiums on bonds following yesterday’s announcement of the economic booster package. However, the unexpectedly high producer prices sound a warning to the new government, which intends to permanently shed the constraints of the debt brake. Inflation is not yet under control and could be exacerbated by high new borrowing.
One key takeaway in recent days is the global military build-up. The U.S.’s withdrawal from its role as the world’s police force not only compels Europe to increase defense spending, but Russia has already shifted toward a wartime economy. China, too, has announced plans to expand its already second-largest military budget globally by over seven percent, aiming for “around five percent” growth despite U.S. tariffs. It is to be hoped that this military expansion serves merely as deterrence and is never put to use. Trump’s proposal to Russia and China to collectively spend less on defense has fallen on deaf ears.
On Wall Street, uncertainty looms regarding whether Trump will back down verbally to support market prices. Should today’s talks with the Canadian President prove unsuccessful, tariffs are likely to remain in place for some time, potentially leading to another downturn in stock prices. Both sides of the Atlantic continue to be significantly influenced by political developments.”
Written by Jochen Stanzl, Chief Market Analyst at CMC Markets
