Europe stocks higher; Germany’s DAX up 3.5%, borrowing costs spike on debt brake deal

The Stoxx 600 index was 1.64% higher at 9:58 a.m. U.K. time, following the broad downturn in global equities on Tuesday on tariff concerns. The Stoxx autos index, which tumbled nearly 6% in the previous session, rebounded by 3.4%. Utilities and food and beverage were among the sectors in the red. German stocks were the top performers regionally, with Frankfurt’s DAX index up nearly 3%. Top gainers included construction firm Hochtief, up 17%, manufacturer Kion Group, up 15.4%, the country’s biggest lender Deutsche Bank, up 9.7%, and Siemens Energy, up 9.6%. Regional defense names also continued their recent rally, with the Stoxx Aerospace and Defense index rising 3%. On Tuesday, Germany’s conservative alliance and the Social Democratic Party — the two groups expected to form the next coalition government following last month’s election — agreed to try to reform the constitutional debt brake system in order to enable defense spending in excess of 1% of GDP. Friedrich Merz, widely billed as likely to become the next chancellor of Europe’s largest economy, said they would also seek to create a 500 billion euro ($529 billion) credit-financed special infrastructure fund over ten years. Alterations or exemptions to the debt brake system have been seen as crucial as a way to allow fiscal loosening to boost Germany’s struggling economy and increase military spending in-step with other European countries. The step remains politically contentious. The yield on German 10-year bonds, seen as the euro zone benchmark, was more than 20 basis points higher at 2.681% following the news. The 2-year yield jumped more than 15%. The euro extended its late Tuesday gains by another 0.84% against the U.S. dollar, reaching its highest level for four months. “At this stage, it looks as if Germany will run budget deficits comfortably over 3% of GDP over the next couple of years rather than keeping the deficit at around 2.5% as we had previously assumed,” Andrew Kenningham, chief Europe economist at Capital Economics, said in a Tuesday note. He said the German announcement showed Merz was “prepared to act decisively” on the economy, but that the additional borrowing that will be needed to finance the extra spending would put upward pressure on Bund yields. Elsewhere, the introduction of fresh U.S. tariffs has been rattling global market sentiment amid concerns they will reignite inflation and escalate a global trade war. Wall Street has seen two days of declines as 25% duties on Canada and Mexico went into effect on Tuesday, as well as an additional 10% tariff on Chinese goods. All three countries have announced retaliatory measures. U.S. stock futures rose overnight, however, after U.S. Commerce Secretary Howard Lutnick said Trump “probably” will announce tariff compromise deals with Canada and Mexico on Wednesday.