European stocks opened higher Wednesday amid optimism that U.S. President Donald Trump’s 25% duties on Canada and Mexico could be relaxed, with investors also paying close attention to the potential reform of Germany’s contentious debt brake system.
The Stoxx 600 index was 1.05% higher shortly after the open, 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 2.4%. Utilities and food and beverage were among the sectors in the red.
On Tuesday, the 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. The step remains politically contentious.
The yield on German 10-year bonds, seen as the euro zone benchmark, jumped more than 21 basis points to 2.697% at 7:59 a.m. London time. The 2-year yield was 14 basis points higher.
The euro extended its late Tuesday rally by another 0.47% against the U.S. dollar.
Euro/U.S. dollar.
“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.
The U.K.’s FTSE 100 index is expected to open Wednesday 56 points higher at 8,806, Germany’s DAX up 416 points at 22,733, France’s CAC 146 points higher at 8,176 and Italy’s FTSE MIB 403 points higher at 38,282, according to data from IG.
The introduction of fresh U.S. tariffs has rattled 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.