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Friday, February 21, 2025

Election Countdown: Euro Buxl slips while German Defence, Infrastructure & Mid-Caps draw focus

By Century Financial in 'Investment Insights'

Election Countdown: Euro Buxl slips while...
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In Layman’s Terms

  • Germany’s coalition government collapsed in late 2024 over economic and budget disagreements. A new government will form after the snap election on February 23, 2025.
  • The new German government may ease debt rules and increase spending through stimulus funded by new bond issuances, potentially weighing on Euro Buxl.
  • A potential Russia-Ukraine peace deal and eurozone stimulus could further strengthen the euro.
  • Potential sectors to benefit include defense, infrastructure, and German mid-caps.
 

Latest Polls - Political Polarization

 
  • The CDU/CSU alliance leading with 30% support, followed by the far-right AfD at 20%.
  • Olaf Scholz's SPD is in third place with 15% support, its worst result since World War II.
  • The Greens are in fourth place with 13% support.
  • Around 28% of voters remain undecided, adding to the uncertainty.
  • Both Scholz and CDU leader Friedrich Merz ruled out a coalition, increasing election uncertainty.

 

German Bonds under Pressure - Euro Buxl Slumps

  • Germany might consider abandoning its “debt-brake” and ramping up bond issuances to finance spending, which could pressure Euro Buxl.
  • Trump wants EU nations to spend 5% of GDP on defense, but only Poland is close. Italy and Spain lag, and the issue is divisive in France and Germany.
  • Only 23 of 32 NATO members met the 2% spending target last year. If raised to 3%, EU nations would need an extra 0.8% of GDP annually, with Spain and Germany seeing the biggest hikes.
  • NATO planners expect the alliance will need to allocate up to 3.7% of GDP for defence.
  • This might warrant joint debt issuances, with an additional $3.1 trillion in spending estimated over the next decade.
  • EU leaders are discussing new funding measures, with proposals expected before the March 20-21 summit.
  • Higher defense spending expectations have pushed Germany’s 10-year yield to its highest since January, pressuring longer-term bonds like the Euro Buxl.

Date: 18 February 2025
Source: Bloomberg

Euro-Dollar Uptrend

  • EUR/USD rose from 1.01 to 1.05 in February, supported by a weaker dollar as Trump used tariffs for negotiation rather than enforcement.
  • A potential Russia-Ukraine peace deal could strengthen the euro by lowering geopolitical risks.
  • The eurozone faces slow growth, high costs, and weaker trade with China, leading to a modest 2025 growth forecast of 1.1%.
  • Structural stimulus could boost the eurozone’s growth potential and support the euro.

Euro-Dollar: We Can Forget Parity for Now

Potential Boost for Defence, Infrastructure & German Mid-Caps

* Last price reflects the closing price as of 18 February 2025.
** Recommendation Consensus is out of 4.
Date: 19 February 2025
Source: Bloomberg

  • Germany may ease debt rules to fund defence spending and stimulate its economic. This could benefit sectors like defence, infrastructure, and mid-sized companies while also pressuring bond prices due to a higher supply of debt.
 

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