Image Source: Pixabay
 

"Germany's "whatever it takes" spending spree is being orchestrated by Friedrich Merz, who spent the recent campaign arguing against doing any such thing. This isn’t a great advertisement for democracy, and there will be real trouble if it goes wrong." - Bloomberg's John Authers. ( I have not missed a JA article in over 2 decades; simply a must)

Germany just detonated a trillion-euro fiscal bomb, and Frankfurt traders are behaving like they’ve just front-run the biggest macro trade of the decade. This isn’t just a policy tweak—it’s a total economic doctrine shift. The land of budget surpluses, debt brakes, and a pathological fear of inflation has just ripped up the rulebook and gone full-send on fiscal stimulus.

Barely a week ago, traders were bracing for a €200 billion spending package—already a head-spinning figure. Now? Try €900 billion and closing in on the psychological $1 trillion threshold. The mood on the trading floor? Somewhere between euphoria and disbelief. After decades of surgical austerity, Germany has suddenly decided that spending like a drunken hedge fund manager is the new playbook.

But this isn’t just about the money—it’s about how it’s getting rammed through. A lame-duck parliament is rubber-stamping it in two weeks, knowing full well that once the newly elected government takes over, the votes might not be there. Friedrich Merz, the architect of this historic shift, campaigned against it just months ago. If this blows up in Germany’s face, expect political chaos on an ECB-intervention scale.

There’s also the not-so-small matter of the Greens feeling snubbed. While they’re unlikely to derail the package, they might throw in a last-minute curveball to remind everyone they exist. Meanwhile, Germany’s Bundesrat still needs four extra votes to push this through. It should be a formality, but this is European politics—nothing is ever a formality.

The real wildcard? The ECB. The last time Germany went on a fiscal bender—post-reunification—the Bundesbank went ballistic, jacking rates to 8.75% and triggering an EU-wide currency crisis. The ECB might be a different animal, but it still has hard-money Bundesbank DNA. If they see this fiscal bazooka as an inflation time bomb, rate hikes could hit faster than traders expect.

Meanwhile, across the Atlantic, Washington is getting dunked on harder than a 2x levered long in a bear market. JD Vance has somehow managed to unite the entire German establishment against him. His election interference, patronizing history lectures, and public humiliation of Zelenskiy have made him Frankfurt’s most loathed figure since the 2008 banking crisis. But ironically? His antagonism worked. If his strategy was to force Germany into picking up its defence tab, the mission accomplished. The U.S. is now so politically radioactive in Europe that Berlin is actively pivoting away from American defence contractors. Expect a full-scale shift toward European arms manufacturing—no more Uncle Sam military handouts.

There’s also serious buzz about repurposing auto plants into weapons factories and turning assembly lines into missile production hubs. This isn’t just defence spending—it’s an entire industrial realignment.

Markets, of course, are having a field day. German stocks are screaming higher, the euro is mooning, and bond markets are convulsing. A trillion-euro fiscal wave isn’t just stimulus—it’s a liquidity supernova. But here’s the catch—if bond yields keep spiking, this whole party could turn into a sovereign debt crisis overnight.

So what’s the big picture? This isn’t just Germany turning on the money taps—it’s the biggest policy shift in modern German history. If it works, Europe finally ditches its austerity baggage and supercharges its economy. If it fails? Let’s just say, the last time Germany went all-in on a fiscal gamble, the economic hangover lasted a decade.

For now, traders aren’t asking questions. The floodgates are open, the algos are in full risk-on mode, and markets are riding the fiscal tsunami.

What just unfolded in the global bond market was nothing short of a VAR shock on steroids—a monster move that sent fixed-income traders scrambling for cover. This wasn’t just a routine repricing; it was the kind of seismic jolt that forces risk managers to reassess their entire playbook.

Yet, somehow, risk assets are holding up surprisingly well. The key reason? German yields, while ripping higher, are still trailing continental yields and haven’t hit full-blown panic mode. In other words, the market is watching, absorbing, but not quite spiraling—yet.

There’s a delicate balancing act at play. If German bunds keep blowing out, the dominoes could start toppling. But for now, the market seems willing to buy into the “controlled detonation” narrative—big shifts, but no sovereign crisis just yet.

The real question: is this a temporary repricing, or the start of a bond vigilante resurgence? If yields keep grinding higher, risk assets won’t be able to ignore it forever.

Europe is essentially undergoing a massive leveraging exercise, throwing open the fiscal floodgates in a way we haven’t seen in decades. But here’s the problem: the last thing you want in a debt-funded spending spree is a runaway spike in sovereign bond yields. And yet, that’s exactly what’s happening.

If this bond market tantrum continues, we’re staring down three possible scenarios:

1. Sovereign stress kicks in. Some EU nations find themselves priced out of the debt market, struggling to relever at manageable costs. The bond selloff intensifies, and before long, the fiscal fragility club—think Italy, Spain, Greece—starts looking shaky. This is NOT bullish for the euro. If you’re buying EUR while sovereign yields are blowing out, good luck—you’re basically front-running bond vigilantes sharpening their knives.
2. Germany turns into Europe’s piggy bank. Berlin decides to absorb the shock, effectively underwriting the rest of the continent’s liabilities. This is a political nightmare in the making, but if Merz wants to hold the EU together while keeping rearmament plans intact, he may have no choice but to throw Germany’s balance sheet at the problem.
3. Markets cool off. Some of today’s panic unwinds, sovereign spreads tighten back up, and traders breathe a sigh of relief. But with bond markets already on edge, another spike in yields could easily turn this into a full-blown sovereign selloff that wreaks havoc on financial conditions.

One more day like today, and we’re talking about a crisis-level yield jump that could spiral into a sovereign debt shock. If that happens, expect global risk sentiment to take a serious hit—and don’t be surprised if the ECB is forced to step in with verbal (or actual) intervention sooner rather than later.
 

FOREX MARKETS

EUR/USD is hovering around 1.08 after a seismic shift in European yields, but let’s not get ahead of ourselves. Currently, the pair is only 1-1.5% overvalued across a spectrum of market models —not nearly stretched enough to justify fading this move, especially with two major risk events on deck: the ECB today and U.S. payrolls tomorrow.

I’m still riding half of my monster position—it's a serious trade—but I’ve got my stops locked to bank the big wins while keeping an eye on 1.0950+. No need to get cute here; in this game, the re-entry door is always open.

We've just witnessed an unprecedented move in German debt markets, with European rates going haywire. German yields spiked 30bps after the fiscal announcement—an eye-popping shift that’s hard to ignore.

With momentum still in play, it's tough not to stay in the trade this week, as some upside follow-through seems likely before the broader macro narrative starts turning this setup rotten to the core. For now, the path of least resistance looks higher—until the cracks start to show.

The implications for the euro are nothing short of seismic, and traders are gripping their desks like a rollercoaster ride that just hit turbo mode. EUR/USD has gone full throttle to 1.08, racking up a blistering 3% rally in just two sessions. But here’s the kicker—this move still isn’t stretched. That’s right, despite the fireworks in FX land, there’s still room to run if the macro backdrop keeps tilting in the euro’s favor.

And boy, has it tilted. The Fed vs. ECB rate path divergence has gone from a slow burn to a full-on rupture. The EUR:USD two-year swap rate gap has tightened to -145bp from -175bp in just a week. Translation? The market has gone all-in on repricing the ECB curve higher while simultaneously hacking away at the Fed curve. You don’t see moves like this every day—this is the FX equivalent of watching a heavyweight fight where one boxer suddenly realizes he forgot his gloves.

So, is this the top? Not so fast. Two major landmines lie ahead—today’s ECB decision and tomorrow’s U.S. payrolls.

First up, the ECB rate cut. No surprises there—a widely expected 25bp trim is baked in. But the real show? Christine Lagarde’s tone. Will she drop the “restrictive” label on monetary policy, or will the Bundesbank hawks make sure she keeps it? With Germany’s trillion-euro fiscal bazooka locked and loaded, and inflation risks quietly creeping back, there’s a solid chance she leans cautious. And if the old Bundesbank DNA is still pulsing through the ECB, she might have no choice but to deliver a hawkish cut.

But let’s talk about 1.10. The thought of EUR/USD punching through that level might get euro bulls foaming at the mouth, but let’s not ignore the elephant in the room—U.S. tariffs on the EU. That alone should keep the brakes on an all-out euro moonshot. Rate differentials will start mattering again soon, but for today and tomorrow, we’re trading in the land of momentum monsters.

Bottom line? Trying to pick the top here is like standing in front of a freight train because you think it’s “probably” slowing down. Stay in the trade, but keep your stops tight—because this ride isn’t over yet.

More By This Author:

The Fading 'Trump Bump' Gives Way To The 'Trump Put'
As U.S. Exceptionalism Crumbles, Germany Shatters Its Fiscal Ceiling
Markets Take A Swan Dive As Trump’s Tariff Tirade Spooks Investors