Aurelia Butler

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The dramatic rise in Germany’s financing costs this week is far from a rejection of Friedrich Merz’s fiscal bazooka, investors say, with many believing the chancellor-in-waiting’s spending plan can boost growth without stretching Berlin’s finances beyond a sustainable level.German Bunds had their biggest one-day sell-off in decades on Wednesday as markets adjusted to a dramatic change in German fiscal policy, and a massive increase in debt issuance, following Merz’s “whatever it takes” plan to spend on defence and infrastructure.Despite settling down at the end of the week, the 10-year Bund remained elevated above 2.8 per cent on Friday, having started the week below 2.5 per cent.“German authorities have finally woken up to the fact that they needed to take drastic actions to revive their economy” and bolster their defence, said Nicolas Trindade, a senior portfolio manager at Axa’s investment arm. “This is positive for growth over the medium term, and Germany definitely has enough fiscal space to accommodate this very large extra spending.”Economists as early as Thursday morning started to revise up their growth forecasts. BNP is now forecasting that German GDP will rise by 0.7 per cent this year and 0.8 per cent in 2026, instead of a 0.2 per cent and 0.5 per cent increase. The uplift in expectations also helped drive German stocks to a record high on Thursday.The rise in Bund yields and stock prices was “an endorsement of the positive impact this policy shift will have on German growth”, said Gordon Shannon, a fund manager at TwentyFour Asset Management.Yields rose as traders moved to trim their expectations for European Central Bank rate cuts on the stronger outlook, even before Thursday’s meeting took the Eurozone benchmark rate down a quarter-point to 2.5 per cent. Traders are now fully pricing in only one further quarter-point cut, according to levels in swaps markets.The other major factor in the jump in yield, investors said, was the massive rise in Bund issuance, an asset that sets a benchmark for Eurozone debt prices but has often been in short supply due to Germany’s “debt brake” limiting government borrowing.That scarcity — also due to central banks holding a large proportion of the available stock — is one reason Bund yields have traded below zero for prolonged periods over the past decade.Traders began betting in earnest on higher Bund issuance last year as speculation rose over debt brake reform, taking 10-year Bund yields above the rate for euro interest rate swaps for the first time as investors braced for more supply. Higher yields reflect the risk that the broader Eurozone debt market might have “difficulty” in absorbing the supply of issuance “if the new fiscal headroom is indeed utilised”, said Felix Feather, economist at asset manager Aberdeen.It was not, he said, driven by a perceived increase in credit risk. “The possibility of Germany defaulting on or restructuring its debt is not a concern for us at this point,” he said.This was miles away, investors said, from the experience of the UK in 2022, when Liz Truss’s ill-fated “mini” Budget sparked a gilts crisis. A similar extreme scenario in Germany would have ramifications across the euro area.“Germany is the backbone of the Eurozone. If the German budget gets out of control, the Euro will be toast,” said Bert Flossbach, co-founder and chief investment officer of German asset manager Flossbach von Storch.The country’s light debt burden — with debt amounting to around 63 per cent of GDP, versus close to or above 100 per cent for some other big economies — means such a scenario is viewed as highly unlikely. There is more concern among investors about the potential repercussions of the shift higher in borrowing costs for other Euro area countries that are already much higher leveraged. The spread between German yields and those of other Eurozone borrowers such as France and Italy remained stable this week, a sharp contrast to historic moments of stress such as the Eurozone debt crisis. But the rise in yields in lockstep with Germany will still put pressure on countries with larger debt burdens.UK bonds were caught up in the sell-off, with the 10-year yield above 4.6 per cent on Friday, up from its low last month of below 4.4 per cent, as it comes only weeks before the government makes a statement on the public finances on March 26. The rise in yields put more pressure on chancellor Rachel Reeves to “deliver tax hikes or spending cuts to stay within her fiscal rules”, said Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management.A key factor in where Bunds go from here will be whether the hoped for German economic growth emerges.In one of the most optimistic outlooks, German economic think-tank IMK predicted that the German economy over the medium term may return to growth rates of up to 2 per cent — a rate of expansion slightly above the 1.8 per cent per year seen in the 15 years prior to the pandemic. Analysts also warn that a debt-funded investment spree will not be sufficient to overcome Germany’s persistent growth crisis, which many attribute to deeper issues like an ageing workforce, bureaucracy and an outdated industrial structure.The export dependent manufacturing sector is also hit hard by geopolitical tensions. “Wider deficits alone won’t solve any of [those challenges],” said Oliver Rakau, chief Germany economist at Oxford Economics.But other analysts are more positive. Bank of America called the fiscal stimulus a “game changer” for German growth that, paired with the higher bond issuance, pointed to a “meaningfully higher” forecast for the 10-year Bund yield than it had previously envisaged.“Bund yields are not going up out of fear, because Germany has plenty of fiscal space,” argued Mahmood Pradhan, head of global macro at Amundi. “The markets are treating this as a growth positive outcome.” More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldFederal Reserve chair Jay Powell played down concerns over US growth after U-turns by Donald Trump’s administration, disappointing jobs numbers and a tumultuous week in financial markets.Powell on Friday said the world’s largest economy remained “in good shape” despite the elevated “uncertainty”, after the president launched an aggressive agenda of tariffs and spending cuts.“We are focused on separating the signal from the noise as the outlook evolves,” Powell said, adding the Fed was in no “hurry” to cut interest rates and was “well positioned to wait for greater clarity”.Powell’s comments came as the blue-chip S&P 500 ended the week down 3.1 per cent, its worst run since early September. US stocks have pulled back sharply in recent weeks after gloomy economic reports prompted worries Trump’s tariffs will slow growth. Corporate executives warned the chaotic pivots in trade policy, including a major reversal this week on the administration’s plans to tariff goods from Canada and Mexico, had made it difficult to run their businesses, and could stymie fresh investments into the US. Show video infoThe US is “at a crossroads, economically”, said Charles Lemonides, chief investment officer at ValueWorks, a New York-based hedge fund. “We don’t know where policy is going and it creates huge turmoil.”The Bureau of Labor Statistics on Friday released data showing the US created 151,000 jobs in February, falling short of the 160,000 forecast by economists polled by Reuters.The unemployment rate was 4.1 per cent last month, compared with expectations it would hold steady at 4 per cent. “Investor sentiment was euphoric after the election but there’s been a whole lot of cold water thrown on that euphoria over the past month,” said Jim Tierney, head of the concentrated US growth fund at AllianceBernstein. “Powell is saying everything is fine, but that’s not what consumer sentiment is saying and it’s not where we’ve heard business sentiment to be, either,” he added.The Fed chair had recently signalled the central bank would keep its main interest rate at its current range of between 4.25 per cent and 4.5 per cent as it assessed the impact of Trump’s policies. But markets are increasingly betting the Fed will be forced to cut rates more aggressively this year than thought, dragging Treasury yields lower and weighing on the dollar. The US dollar index, which tracks the greenback’s strength against six other currencies, has lost 4.3 per cent this year.Asked what would prompt the Fed to respond to tariffs imposed on US imports, Powell said on Friday: “What would really matter is what’s happening with longer-term inflation expectations and how persistent are the inflationary effects.”Some economists have warned Trump’s spending cuts and the slashing of the federal workforce through the so-called “Department of Government Efficiency”, led by billionaire Elon Musk, could also be a drag on the economy. Earlier in the week, Trump rolled back some of the tariffs he imposed on Canada and Mexico in an attempt to soothe markets. On Friday, he acknowledged some economic pain might come from his policies and their sometimes chaotic rollout.“There could be some disturbance, a little bit of disturbance,” the president said, repeating a line from his speech to Congress on Tuesday night. “There will always be changes and adjustments.” More

Donald Trump has threatened Russia with additional “large-scale” sanctions and tariffs, as the US president shifts to piling pressure on Moscow in an effort to broker a peace deal in Ukraine.Trump’s comments on Friday come as tensions have eased with Ukraine’s President Volodymyr Zelenskyy following a public confrontation in the White House last week, which led to the US suspending military aid and intelligence support to Kyiv. US and Ukrainian officials are due to meet next week in Saudi Arabia for talks. National security adviser Mike Waltz and secretary of state Marco Rubio will head the US delegation.“Based on the fact that Russia is absolutely ‘pounding’ Ukraine on the battlefield right now, I am strongly considering large scale Banking Sanctions, Sanctions, and Tariffs on Russia until a Cease Fire and FINAL SETTLEMENT AGREEMENT ON PEACE IS REACHED,” Trump wrote on his Truth Social platform.“To Russia and Ukraine, get to the table right now, before it is too late. Thank you!!!” he added.Trump has faced criticism from US allies as well as domestic lawmakers, including some Republicans, for his clashes with Zelenskyy. Concerns are growing that the White House is handing all the leverage to Russia even before direct talks begin between Moscow and Kyiv.In the Oval Office later on Friday, Trump returned to friendlier rhetoric towards Moscow.“I’m finding it more difficult, frankly, to deal with Ukraine [than Russia],” the president said. “I find that in terms of getting a final settlement, it may be easier dealing with Russia, which is surprising, because they have all the cards, and they’re bombing the hell out of them right now.”However, he did say that his Truth Social post was “a very strong statement” to Moscow saying it “can’t” continue its intense bombing of Ukraine.Trump said he did not think Russian President Vladimir Putin was taking advantage of the halted intelligence sharing from Washington to Kyiv and was instead “doing what anybody else would do”.“I think [Putin’s] hitting [Ukraine] harder than he’s been hitting them. And I think probably anybody in that position would be doing that right now. He wants to get it ended,” he said.Despite Moscow’s bombing campaign, Trump said he did not want to keep supplying Kyiv with air defences since “I have to know that they want to settle. I don’t know that they want to settle.” Trump added that before he thinks about US security guarantees for Ukraine, he wants the war settled. “Ukraine has to get on the ball and get a job done,” he said.US officials had previously threatened sanctions on Russia in an effort to push Putin towards the negotiating table, but Trump emphatically renewed that message on Friday.The White House has not offered any details of the threatened sanctions and tariffs on Russia. Kevin Hassett, director of the National Economic Council, told reporters on Friday that “there are a heck of a lot of things that are left, for sure” to sanction “but . . . let’s see how it goes”.Russia remains under sweeping sanctions imposed by former president Joe Biden, including on its financial services, defence and energy sectors. The US has also targeted top Russian business leaders and oligarchs with sanctions. The sanctions have cut Russia’s trade surplus by more than half, from $337bn in 2022, the first year of the war, to just $151bn last year, said Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center in Berlin. The most painful measures were the sanctions against oil exports, which have forced Russian companies to sell at a discount while raising their logistics and financial costs, and financial sanctions that have created cumbersome barriers for the country’s companies making international transactions, as well as sanctions on its airline sector.The sweeping approach taken by the Biden administration meant that Trump can do relatively little to ratchet up pressure, Prokopenko said. “There’s no sanctions bazooka any more and the US can’t inflict real pain,” she added.But Trump officials say the sanctions from Biden were ineffective, particularly with respect to Russia’s all-important energy sector. “A major factor that has enabled the Russian war machine’s continued financing was the Biden administration’s egregiously weak sanctions on Russian energy,” Scott Bessent, the US Treasury secretary, told the Economic Club of New York on Thursday.He suggested that the Biden administration had held back on imposing more severe sanctions due to “worries about upward pressure on US energy prices during an election season”.“What was the point of substantial US military and financial support over the past three years, without a commensurate and fulsome sanction support?” he asked. The White House has previously dangled the possibility of an easing of sanctions on Russia if it reaches a peace deal with Ukraine, and officials have even pointed to business opportunities for US investors in the country in the event an agreement is reached. Higher tariffs on Russian imports will have limited impact since the country’s trading with the US has collapsed in recent years. According to the US trade representative’s office, goods imports from Russia amounted to $3bn in 2024. More

If you’re reading this on a day that ends with -day, there’s been news that US tariffs are on, off, delayed, or exemption-riddled. This is surely the kind of strong, decisive leadership Americans voted for in November.Alphaville could spend lots of time thoroughly analysing the signs that the US is FAFOing itself into one of the dumbest economic downturns in history . . . But it’s been a disease-riddled week and it’s now Friday, so instead we’ll just sum up the current state of Trumponomics through its most appropriate medium: the meme.We’re crediting either the creator — when we think we know who it is — or the person who sent it to us first. Thanks to FTAV readers for stepping up to the plate.© @bisphamgreen.bsky.social‬© @TBPInvictus© Alexander Clarkson© Ben Carlson© Sean Tuffy© @SkylerforNY © Sean Tuffy More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe euro is on track for its best week against the dollar since the global financial crisis, as investors bet that Germany’s historic fiscal stimulus will help power an economic recovery in the Eurozone. The single currency has climbed more than 4.5 per cent against the dollar this week, its biggest rise since 2009, on the prospects for a rebound in Europe just as Donald Trump’s aggressive trade policy raises concern over the health of the American economy. The lightning rally in the euro comes after Germany’s Chancellor-in-waiting Friedrich Merz announced a deal to fund investment in defence and infrastructure, as European leaders prepare to shoulder more of the burden for the region’s security and support Ukraine.The European Central Bank reduced interest rates to 2.5 per cent on Thursday, but signalled a possible slowdown in future cuts. Following the ECB move and Germany’s stimulus plan, traders are now fully pricing just one cut this year, down from two a week ago. “Trump has effectively pushed towards European co-operation which none of us had on our bingo cards,” said Adam Pickett, head of global macro strategy at Citigroup. “It’s a game-changer for interest rates going forward . . . the ECB might need to cut less.”Some content could not load. Check your internet connection or browser settings.The prospect of faster Eurozone expansion is supporting the single currency just as a string of disappointing US economic data and growing fears over the impact of Trump’s erratic tariff policies have hit the dollar.According to levels in swaps markets, traders now expect the Federal Reserve to make three quarter-point interest rate reductions this year compared with expectations at the start of the year for less than two.“There was the view that the US would almost be immune from tariffs . . . but instead there is now much more uncertainty,” said Pickett.The euro strengthened further after the monthly US jobs report, released on Friday, showed the economy added 151,000 positions in February, short of the 160,000 expected by economists, before giving up some of the gains. The single currency was up 0.7 per cent at $1.086 by late afternoon trading, its strongest level since early November.  Its resurgence marks a dramatic reversal from its weakness following Trump’s election victory in November, when the dollar rallied on hopes the US president’s programme for tax cuts and deregulation would boost the American economy. A number of investment banks have now ripped up previous predictions that the euro could fall to parity with the dollar.Until this week, economists had expected the German economy, the eurozone’s largest, to stagnate this year, weighing on the euro. Analysts at Goldman Sachs said the economy could expand by as much as 2 per cent next year if the fiscal package was swiftly implemented, up from a previous forecast of 0.8 per cent.In a sign of the broad weakness in the dollar, the US currency is close to giving up all the gains against other major currencies it had made since Trump’s election victory.“The street is turning quite bullish on the euro now . . . [it is] hard not to jump on the bandwagon,” said Brad Bechtel, an analyst at Jefferies. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldDonald Trump is confident that Chinese President Xi Jinping will not attack Taiwan during his time in the White House, according to US Treasury secretary Scott Bessent.Speaking on CNBC, Bessent said Trump was “confident that President Xi will not make that move during his presidency”. Bessent was responding to a question about whether he thought China would attack Taiwan. US intelligence officials said Xi had told the People’s Liberation Army to develop the capabilities to invade Taiwan by 2027, but they had also stressed this does not mean 2027 is a deadline for war.The White House did not respond to a question about whether Bessent’s assertion was based on any new intelligence.Tensions over Taiwan have risen significantly over the past few years, and particularly since Nancy Pelosi in 2022 became the first US House Speaker to visit Taiwan in 25 years.The PLA has rapidly expanded operations around Taiwan. Speaking at the Honolulu Defense Forum last month, Admiral Samuel Paparo, head of US Indo-Pacific command, said the exercises were no longer just training.“Their aggressive manoeuvres around Taiwan right now are not ‘exercises’, as they call them, they are rehearsals . . . for the forced unification of Taiwan to the mainland,” Paparo said in response to a question from the Financial Times.Bessent’s comments on China and Taiwan come as Taipei has become nervous that Trump’s stance on Ukraine could herald a weakening of the US’s decades-long support for the Asian country.US-China tensions spiked during the Biden administration because the countries were at loggerheads over a range of security-related issues. Since Trump took office, tensions have centred on trade. The US president has imposed a 20 per cent tariff on imports from China.The White House said the tariffs were designed to pressure Beijing to crack down on the export of ingredients for the deadly opioid fentanyl.It added that they were also intended to end subsidies for groups that make the dual-use chemicals sold to cartels in Mexico and used to produce fentanyl that is smuggled into the US.Chinese foreign minister Wang Yi on Friday described Trump as “two-faced” and said Beijing would take “countermeasures in response to arbitrary pressure” from Washington.“No country should fantasise that it can suppress China and maintain good relations with China at the same time,” Wang said at a press conference. “Such two-faced acts are not good for the stability of bilateral relations, or for building mutual trust.”Earlier this week, the Chinese embassy in Washington said it was ready to respond to any fight with the US, including war. “If war is what the US wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end,” the embassy wrote on the social media platform X. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldIreland’s Taoiseach Micheál Martin heads to the White House next week to mark St Patrick’s Day, hoping to escape with only “a couple of kicks” from Donald Trump over his country’s huge trade surplus with the US.Martin is set to become the first head of state or government to visit the Oval Office since Trump’s bust-up with Ukrainian President Volodymyr Zelenskyy.His visit on March 12, five days before St Patrick’s Day itself, comes as the EU scrambles to boost defence spending to protect Ukraine after Trump cut off defence co-operation to the nation and as the bloc, which the president said last month was “formed to screw the United States”, braces for the prospect of trade tariffs.Ireland has deep cultural and business links with the US dating back to mass emigration during its 19th century famine. Trump on Thursday signed a proclamation declaring March Irish-American Heritage Month.He praised Irish-Americans as “great people — and they voted for me in heavy numbers, so I like them even more”.The proclamation referenced Trump’s plans to “correct trade imbalances with the European Union” saying “our historic relationship with Ireland presents an opportunity to advance fairer trade policies”.On that front, Ireland is hugely exposed. Exports of goods to the US rose 34 per cent to €72.6bn last year, compared with 2023, while imports of goods were €22.5bn, a 2 per cent fall on the previous year. US commerce secretary Howard Lutnick has blasted Ireland for running “a trade surplus at our expense”. Earlier this week, the US readout of a call between secretary of state Marco Rubio and Irish foreign minister Simon Harris said the pair discussed “the US priority to address the US-Ireland trade imbalance” — something Harris said was not mentioned directly.The US, however, exports €163bn in services to Ireland, meaning Dublin has an overall trade deficit of €93bn with the US. Martin will stress that Ireland is the sixth largest investor in the US, with the top 10 Irish companies in America employing 115,000 people.But “a couple of kicks” on trade in front of the cameras in the Oval Office were “inevitable,” said one senior government official.“I can’t see how we’d escape that. It’s the way Trump does business — flattery, kick, flattery, kick,” the official said.Ireland is home to major US tech and pharma companies, whose record corporation taxes have fuelled eye-popping surpluses — expected to hit some €24bn this year, boosted by back taxes from Apple that the European Court of Justice ordered Ireland to accept.Trump wants US companies to relocate home and has not ruled out tax incentives to encourage them — a policy that would hit Ireland hard. But Glenn Boehnlein, vice-president and CFO at US medical devices manufacturer Stryker, which has plants in Ireland, said that was not so simple.“You can’t turn anything on a dime — you really aren’t going to pick up manufacturing and move it instantaneously,” he told an EY CFO summit in Dublin this week held in partnership with the Financial Times.“The best-case scenario [for the St Patrick’s Day event] is all shamrocks and leprechauns,” said Ben Tonra, professor of international relations at University College Dublin. He hoped Martin would then “get to say the things he needs to say about Ukraine and Palestine” in private “and get out of that room as fast as possible”.Militarily-neutral Ireland has pledged its unwavering support for Ukraine and says it will “not be found wanting” on future peacekeeping. But Ireland has upset US ally Israel by recognising Palestine’s statehood. More