German bond yields jump, stocks surge as parties agree seismic spending plans

By Naomi Rovnick and Samuel Indyk

LONDON (Reuters) -German government bond yields, equities and the euro all rose on Friday on reports Germany’s Chancellor-in-waiting Friedrich Merz had reached an agreement with the Greens to reform debt rules and massively increase state borrowing.

Merz’s conservatives and the Social Democrats, who are in negotiations to form a government after an election last month, had proposed a 500 billion euro fund for infrastructure and sweeping changes to borrowing rules to revive growth and ramp up military spending.

To reach the two-thirds majority required for the necessary constitutional changes, though, they need the support of the Greens. The three parties reached a deal on Friday, two sources close to the talks said.

Germany’s 10-year government bond yield, the euro area benchmark, was last up 8 basis points at 2.932%.

Germany’s benchmark stock DAX index jumped 2% to a one-week high, while mid- and small-caps, which are more exposed to the domestic economy, rose 3.2% and 3.5% respectively.

"Overall, it’s a good thing. It will unlock growth for Germany and more importantly, it will possibly unlock a new economic paradigm for Europe," George Lagarias, chief economist at Forvis Mazars, said.

"Essentially Europe is moving forward and this is something that markets and investors have long been looking for."

Global equity markets had been higher prior to the news, but were still set for a weekly drop, as angst over U.S. tariffs, inflation and a trade row hitting industries from metals to malt whisky weighed on risk appetite.

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The pan-European STOXX 600 index was up 0.9%, while blue chip indexes in Paris and London added 1.3% and 0.7% each.

MSCI’s broadest gauge of global stocks was up 0.2% on Friday but still down 3.6% for the week, heading for its biggest weekly fall since September.

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Investors have been growing more nervous that trade tensions between the U.S. and Europe would escalate after the European Union retaliated against blanket U.S. tariffs on steel and aluminium.

In response, U.S. President Donald Trump threatened to impose a 200% tariff on European wine and spirit imports.

"I think Trump 2.0 is nothing like Trump 1.0," Michael Strobaek, global chief investment officer at Lombard Odier, said. "This time, the president seems prepared to let U.S. markets and the economy suffer while he implements his ’America first’ goals."

The developments sparked Thursday’s steep selloff on Wall Street, and confirmed that the S&P 500 was in a correction, just a week after similar observations for the Nasdaq index.

Friday’s mood was brighter, with Nasdaq futures up more than 1.2% and S&P 500 futures advancing 0.9%.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan traded 0.9% higher, although it was on track to lose 1.5% for the week, as simmering trade disputes battered global stocks.

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Japan’s Nikkei rose 0.8%.

EURO JUMPS

The euro rose against most major peers on the rising prospects that German parties will agree the fiscal deal that could revive growth.

The single currency was up 0.5% against the dollar to $1.0904. It was up 1.2% against the yen and 0.5% against the pound.

The dollar index , which measures the currency against six others including the euro, was down 0.2%.

Benchmark Treasury yields were up 4 basis points to 4.314%, but remain far below January’s 4.8% level. 

Oil prices, pinned lower this month by recession fears, rebounded on Friday to reflect diminishing prospects of a Ukraine ceasefire, with Brent crude futures adding 0.7% to reach $70.39 a barrel. 

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