The past week could mark a moment of eurozone turning point, indicating a fundamental change in European economic policy. The Union for Assuming German Power has announced a large fiscal package ranging from 12% to 18% of GDP. This includes creating an EUR 500 billion infrastructure fund and easing debt constraints on defense spending, representing a break from traditional traditional spending. exportweltmeister Model.
The Germans have a “Jesus moment” and recognize the need to move from capital exporters to prioritizing domestic investments. This marks the beginning of a change in the macroeconomic regime, with EUR/USD acting as an important transmission mechanism.
Betteridge's headline law suggests that if a news article raises doubts about that headline, the answer is usually “no”. Similarly, placement of question marks in the title of articles I wrote Entertainment investor In September 2022, “Can't Euros be Invested? FX Question Du Jour” was intended to emphasize that inability to invest is a temporary term.
Standing here today, it may be forgiven to think that Germany's waiting list Friedrich Merz conveniently pinned my article in line with Draghi's report on the EU's competitiveness before his policy committee. Perhaps, of course, that is the case of consistent thinking. It will be bolstered by a huge wake-up call from Trump 2.0.
An article I wrote in 2022 also argued that the European Central Bank (ECB) should take on the role of fiscal authority and abolish the ATLAS syndrome, which allows market-driven price discovery on euro religious bonds. That shift is happening now.
The ECB has abandoned its Asset Purchase Program (APP) and Pandemic Emergency Purchase Program (PEPP) and is currently on the Quantitative Tightening Path (QT). It is very encouraging to see the phrase “whatever it takes” comes from the German Prime Minister, not the ECB president.
As Lenin famously said, “There are decades where nothing happens, and there are weeks where decades happen.” This quote may be worn out, but considering the magnitude of the market movement we saw last week, it certainly justifies it to be called. Bund's yields saw the most significant move last week since the fall of the Berlin Wall. The spread of the UST band over the decade (US Treasury and German Pond) was compressed at about 44 basis points, bringing a complete circle to the portfolio balance approach as a key determinant of EUR/USD performance. So it's not surprising that last week, EUR/USD surged from 1.04 to 1.08 handle.
With a focus on domestic investment, the Eurozone net international investment position (IIP) surplus should shrink and probably turn into a deficit. Of course, there are many slips between the cup and the lips. The fiscal package must pass through both the Bandetag and Bundesrat. And there is a deep root in Germany. Schwarze Null (Black Zero) A culture of maintaining a balanced budget needs to be overcome at multiple levels. Nevertheless, market expectations are consistent with the idea that Germany has truly reached an inflection point.
Each year, a noticeable divergence of the trajectory appears along with the yields of us and Germany, and the yield in the US decreases (UST yields decrease by about 30 bps in 10 years), while ribcage yields are rising (residual yields increase by about 50 bps in 10 years).
On the other side of the pond, it reminds me to take President Donald Trump seriously, but not literally. However, for market participants, this leads to increased uncertainty. In general, recent academic literature on financial markets and decision-making highlights the distinction between risk and uncertainty.
Risk arises in situations where the outcome and probability are clearly defined. Uncertainty and ambiguity, on the other hand, refer to situations where the outcome and probability are unknown or unknown. These ideas were first formulated by thinkers like Frank Knight and John Maynard Keynes about a century ago, and are formally detailed in academic literature over the past 30 years or so. They are particularly relevant to the Trump 2.0 era, which begins in deep uncertainty and ambiguity.
Trump's “first break, ask later” approach to government spending and the sustainable policy uncertainty surrounding tariffs has fueled concerns about growth and employment. Of course, these topics guarantee more detailed articles on uncertainty and risk. This could also include words that are not followed by question marks.
summary
Germany's driving force behind the ECB's continued normalization of monetary policy has driven a historic market movement. Last week, Bund Reaves experienced the most significant changes since the fall of the Berlin Wall, with the 10-year UST-Bund spread surged from 44 basis points and EUR/USD to 1.08.
As Germany readjusts for domestic investment, the Eurozone net international investment position (IIP) surplus could shrink or turn into a deficit. Germany's political clarity in enacting policy change contrasts with policy uncertainty across the Atlantic despite the challenge of breaking away from zero black culture. The unpredictability of the Trump era is characterized by policy ambiguity and an approach of “first break, ask questions later.” Investors are tackling a landscape where risk and uncertainty is blurred.
Within the evolving dynamics on both sides of the EUR/USD equation, investors should weigh the possibilities of long-term conversions against short-term noise and consider whether this marks the trading regime on some feet or another chapter of market volatility.
