More logs on the stimulus fire – A true set-and-forget trade?

Wednesday’s market rollercoaster didn’t just shake things up—it launched European markets into orbit. Suppose you were short euros or the DAX, condolences. The common currency ripped higher, stocks in Germany exploded, and Wall Street finally caught a break after Trump’s tariff truce with Canada and Mexico.

Over here in Asia, China just threw another log on the stimulus fire, confirming it will ramp up spending to hit that all-important 5% growth target. The catch? It’s blowing out the budget deficit to a record 4% of GDP—a rare move for Beijing, which usually keeps a tighter leash on its fiscal books.

But hey, big government spending is coming back, so that’s a good thing… right? Well, that depends. Markets love stimulus until they start questioning how sustainable it really is. China is walking a tightrope here. Too little stimulus and the economy sputters. Too much creates a nefarious debt problem.

For now, traders are giving China the benefit of the doubt, but with global growth concerns swirling and geopolitical risks mounting, this isn’t a “set it and forget it” trade. Stay tuned—the next move out of Beijing will be just as critical as this one.

But the real fireworks? Germany just smashed its austerity playbook to smithereens, greenlighting a fiscal bazooka worth 1 TRILLION EUROS—roughly 20% of GDP. That’s not just a policy shift; it’s a full-blown economic doctrine rewrite. And the market? Absolutely on a sugar rush high.

While Europe cranks up the fiscal taps, the U.S. is tightening its belt faster than a trader caught short in a rally.

But back to the real story—markets don’t trade on theory, they trade on momentum. And right now, the DAX is on fire, up 3.4%—its best day in two and a half years—while the euro has staged a near 4% rally in just three days. Traders are scrambling to upgrade their euro forecasts, and suddenly, German and eurozone growth doesn’t look so bleak.

That said, there’s always a catch. While equities and the currency are throwing a fiscal party, bond markets are waving a caution flag. Eurozone yields are spiking aggressively, swap spreads are flashing red, and one very big elephant just waltzed into the room—the ECB.

And that’s where things could get dicey. Rarely, if ever, do European yields explode by 30bps while Treasuries nap. This isn’t just about more Bund issuance—it’s a full repricing of the eurozone’s economic trajectory.

So what’s the play? The ECB is unlikely to give much forward guidance, but if they even slightly soften their language on “restrictive” rates, buckle up—EUR/USD could have another leg higher.

Everything looks golden right now, but any seasoned trader knows that when things are going a little too well, it’s time to start scanning the horizon for the next iceberg. And with the ECB meeting just around the corner, the euro bulls better pray Lagarde doesn’t decide to douse the rally with some good old-fashioned central bank caution.

But that’s not the only risk. Germany’s fiscal flip-flop has been a trader’s dream, but political pressure could turn it into a nightmare. If Chancellor-elect Merz suddenly feels the heat from Berlin’s fiscal hawks and decides to pull a semi U-turn, we could be looking at one of the biggest "sell the news" moments in European markets this year.

The party’s still raging for now, but smart money is already thinking about the exit strategy.( as they always do)

The view

China

But let’s be real—China’s 5% GDP target is about as shocking as the sunrise. They’ll hit it one way or another because, let’s face it, when it comes to Chinese economic data, the fog is always thick, but the outcome is never in doubt.

Official growth figures out of Beijing have all the suspense of a pre-written novel—predictable, polished, and politically convenient. Whether it’s real growth or a statistical magic trick, markets have learned to play along.

The bigger takeaway? The commitment to 5% means one thing: more stimulus is coming. China isn’t leaving anything to chance—expect a mix of credit easing, fiscal firepower, and the occasional "suggestion" to state banks to keep the machine humming.

So traders will take the number at face value, but the real game is reading between the lines—how much will Beijing have to juice the system to make it happen? Because when the fog eventually lifts, that’s what will really move markets.

Europe

For decades, Europeans have treated the welfare state like a birthright, untouchable pillar of society. But the truth? It was always a historical fluke, a byproduct of an era that no longer exists.

Let’s rewind. The golden age of “welfarism” wasn’t built on economic genius—it was built on two giant crutches.

First, the NATO free ride. Uncle Sam picked up the tab for European security, letting governments splurge on butter instead of guns. Sure, they still bought plenty of firepower, but with the U.S. covering the big-ticket defense costs, Europe had the luxury of building its welfare wonderland.

Second, zero global competition. When the social safety net was at its strongest, China and India weren’t in the game yet. There was no cutthroat manufacturing race, no emerging-market powerhouse eating Europe’s lunch. The continent thrived inside a cozy economic cocoon.

And then there’s the demographic ticking time bomb.The math just doesn’t add up anymore. Even before Europe’s new defense reality, pension and healthcare liabilities were already on thin ice. Now? They’re an economic fantasy

So here’s the new moral riddle: Governments want the young to both carry rifles and bankroll an aging population. The choices? Tighten the screws on entitlements—unleash the fury of the pensioners—or gut more productive areas of spending. Either way, someone’s taking a haircut.

Make no mistake—the welfare state isn’t vanishing, but it’s about to go on a brutal diet. It was never designed for a world where hitting 100 is just another birthday or to bankroll migrants and the ever-expanding out-of-work benefits bill.

The real question? Will the public swallow the bitter pill? History suggests that rich, democratic societies don’t do preemptive pain—they wait for a crisis to force their hand.

And with Europe now staring down its most significant security threat in decades, that crisis might arrive sooner than expected.