As US exceptionalism crumbles, Germany shatters its fiscal ceiling

Wall Street took a beating as escalating trade tensions sparked a broad selloff, but Germany’s surprise fiscal bazooka helped cushion the blow. The S&P 500 slid 1.3%, the Dow got hammered down 1.6%, while the Nasdaq, the most resilient of the three, shed just 0.3% as traders rotated into tech defensives.

As risk aversion took hold, safe-haven assets caught a strong bid. Gold soared above $2,900/oz, but short-dated Treasuries absorbed the brunt of risk-off flows. Meanwhile, Treasuries saw a split reaction—the front end of the curve rallied as rate-cut bets intensified. Still, longer-dated bonds sold off sharply as Germany’s €500 billion infrastructure and defence stimulus sent a shockwave through global rate curves.

With uncertainty running hot, volatility gauges spiked. The VIX ripped to its highest level of the year, breaching 25.00, while the MOVE index—a key measure of Treasury market volatility—hit a four-month high, signaling that bond traders are bracing for even wilder swings ahead.

Over in credit markets, U.S. high-yield corporate spreads look set to break out of their recent range, widening to 294 basis points—the largest risk premium of the year. This creeping stress in junk bond spreads is a clear signal that credit markets are starting to price in a more fragile economic backdrop.

Meanwhile, oil got clobbered, sliding to a six-month low as global demand fears overshadowed any supply-side concerns. With growth outlooks deteriorating and risk appetite in full retreat, the energy complex is now feeling the weight of macro headwinds.

The big question now: does Germany’s spending blitz trigger a broader global rotation into European assets, or is this just a brief relief rally in a dangerously unstable market? With policy uncertainty running at full tilt and volatility making a comeback, traders should buckle up—this ride isn’t over yet.

Wall Street smelled trouble early. All three major U.S. indices suffered back-to-back losses as traders dumped risk assets in favor of short-term bonds, gold, and safe-haven plays. This isn’t just about growth concerns—it’s about inflation, too. With tariffs set to ripple through supply chains, the focus will soon shift from headline price shocks to the pass-through effects—the VAT-style lag that accelerates inflation down the pipeline. Investors have seen this before, and this time, the impact will likely show up faster in the intermediate maturities of the U.S. yield curve, although the short end should still rally on Fed rate cut bets( dollar bearish)

The FX market’s reaction to the tariff onslaught has been surprisingly muted, largely because the U.S. economic outlook is deteriorating, limiting dollar strength. While tariffs tend to be bullish for the greenback, a free-falling stock market isn’t. With U.S. exceptionalism crumbling through the lens of a tumbling S&P 500, traders are hesitant to back the dollar.

But here’s the real kicker for euro bears—Germany just shattered its own fiscal ceiling. In a spontaneously announced press conference, CDU/CSU and SPD leaders unveiled a €500 billion infrastructure package, tearing up the country’s long-standing debt brake. On top of that, defense spending above 1% of GDP will now be exempt, marking a fundamental shift in Germany’s approach to fiscal policy.

The market reaction was immediate. The euro surged +1.06% as FX traders front-ran the inevitable rush into European assets, with the DAX now looking like the belle of the ball( FX folks will need to buy the news) . With multiple European governments ramping up defense spending and loosening fiscal constraints, the stage is set for a major rotation into European equities.

If this momentum holds, Europe may no longer just be the underdog catching a bid—it could be leading the next global capital shift.

This is also a potential game-changer for the ECB. With fiscal expansion kicking in across the continent, the central bank suddenly has more breathing room and if this trend picks up across the Eurozone, expect a policy shift that could drive a broader Euro asset class rally

What began as a risk-off stampede is now morphing into something bigger—a potential shift in global capital flows. Germany’s fiscal pivot is a major inflection point, and if other EU nations follow suit, the euro and European equities could emerge as the next big macro trade. Markets remain on edge, but one thing is clear: global positioning is shifting fast.

I hope everyone can appreciate the irony here—‘America First’ might just be giving Europe its biggest boost in decades. As the U.S. doubles down on tariffs, protectionism, and political uncertainty, capital is starting to sniff out alternatives, and for once, Europe might actually be the answer.

With Germany throwing fiscal caution to the wind and other EU nations likely to follow, we could be witnessing a broader pivot away from U.S. exceptionalism to—dare I say it—European exceptionalism.

It’s early days, but the rotation into European assets is real—and if this fiscal shift gains traction, the euro and European equities could become the trade of the year.

Despite the safe-haven bid, the yen actually weakened on the day as global yields started ticking higher, flipping the script on traditional risk-off flows. This makes Monday’s EUR/JPY moonshot look even more suspect. It’s hard to ignore the possibility that one of the big German banks caught wind of the fiscal deluge brewing in Berlin well before the official announcement.

Let’s be real—banking is an incestuous business. This is exactly why bank sales desks are stacked with the sons and daughters of corporate titans and political power players. Information flows don’t always wait for official press releases, and when a €500 billion German spending spree is about to hit the tape, you can bet someone got the early call.

For now, the yen’s softness against a rising yield backdrop suggests traders are repositioning for carry trades rather than diving headfirst into full-blown risk aversion. But with policy shifts unfolding fast and volatility creeping back in, this story is far from over. Keep an eye on EUR/JPY—if this move was purely flow-driven, the unwind could be just as dramatic.

The view

If there was ever a moment that ripped the Band-Aid off Europe’s security vulnerabilities, this is it. Washington’s stance on the Ukraine-Russia war has tilted unmistakably toward Moscow, and the fallout has been brutal. Vice President JD Vance’s ice-cold Munich speech, followed by Trump publicly dressing down Zelenskiy like a misbehaving intern, has sent U.S.-European relations into full-blown crisis mode. NATO’s future? Hanging by a thread.

That backdrop should spell doom and gloom for Europe—but here’s where the plot twist kicks in. Instead of rolling over, the past six weeks have jolted the continent into unprecedented action. Germany is on the verge of launching a €500 billion infrastructure war chest, while the European Union is moving to mobilize close to €1 trillion for defense, security, and infrastructure.

That’s not just a fiscal stimulus—it’s a paradigm shift. This is the level of growth-boosting, structural spending that markets have been screaming at Europe to embrace for decades. If it actually materializes, it could rewire the entire global macro landscape.

And let’s be honest—this wouldn’t be happening if the U.S. weren’t backing away. Whether intentional or not, ‘America First’ might have just strong-armed Europe into finally stepping up. Markets are already sniffing out the trade—if this pivot holds, the rotation into European assets could be one of the biggest macro themes of the decade.