The Impact of Fiscal Stimuli on Global Markets
Just as anabolic steroids serve as a boost for bodybuilders, fiscal and monetary stimuli have become essential lifelines for markets and the broader economy. Over the decades, governments around the world have heavily relied on these fiscal injections to enhance market performance and stimulate economic growth.
In a recent turn of events that has delighted bulls in both Bitcoin (BTC) and risk assets, China, the world’s second-largest economy, alongside Germany, a key player in the European Union, have unveiled significant new fiscal initiatives. These measures are expected to soothe concerns in both crypto and traditional markets regarding the potential negative impacts stemming from the Trump administration’s plans for reduced spending and the implementation of tariffs.
The National People’s Congress convened in Beijing, where it set an ambitious target of 5% GDP growth for 2025 while increasing the fiscal deficit target to 4% of GDP. This marks a substantial rise of 100 basis points compared to the previous year’s target of just 2%. Premier Li Qiang emphasized in his speech that, “An increasingly complex and severe external environment may exert a greater impact on China in areas such as trade, science, and technology.” Notably, the newly unveiled plan signifies a shift in focus towards boosting domestic demand and consumption, aligning with Beijing’s long-term vision of transitioning to a more consumer-driven growth model, moving away from reliance on investment.
The decision to maintain the 5% growth target reflects the policymakers’ confidence in stabilizing economic growth, even amidst stronger external challenges, as highlighted by ING.
On the other hand, earlier this week, Germany announced it would be unlocking hundreds of billions of euros for defense and infrastructure investments, marking a departure from its historically stringent fiscal policies. Bloomberg economists remarked that “the massive shift in fiscal policy is likely to give the struggling German economy a much-needed boost. Increased defense spending could provide a cyclical uplift, while the proposed infrastructure package may yield significant long-term gains in potential output.”
In response to these fiscal measures, Asian and European equity markets saw an early rally, buoyed by the news from both China and Germany. Bitcoin also experienced a notable increase of nearly 3%, climbing to $90,000, successfully defending its 200-day moving average just days prior.
Apart from potentially offsetting any fiscal tightening in the United States, the fiscal strategies from China and Germany could exert influence through currency exchange channels, applying downward pressure on the U.S. dollar. Typically, when a country increases its borrowing, it indicates a rise in bond supply, which tends to lower bond prices and elevate yields. This dynamic, in turn, enhances the attractiveness of the domestic currency.
This phenomenon is already observable, with Germany’s 10-year bond yield having surged by 36 basis points to 2.73% since February 25, reaching its highest level since November 2023, according to data from TradingView. Consequently, the spread between the yields of 10-year U.S. and German government bonds has plummeted to 1.49%, a development that is typically negative for the USD. This marks a significant decline from the high of 2.31% recorded in December.
The narrowing yield spread has contributed to an uplift in the EUR/USD currency pair, the most liquid foreign exchange pair, leading to a broad-based sell-off of the U.S. dollar and pushing the dollar index below 105.00 for the first time since November. A weakening of the greenback, which serves as the global reserve currency, tends to ease financial conditions worldwide, fostering an environment conducive to increased risk-taking in financial markets.
