Investing.com - Shares in German arms manufacturers and industrial firms rose on Wednesday after leaders of the parties hoping to form a new coalition government in the country agreed on a deal to loosen Berlin’s strict borrowing limits.
Defense names Rheinmetall (ETR:RHMG) and Renk (ETR:R3NK) moved higher in early trading, as did cement maker Heidelberg (ETR:HDDG) Materials (ETR:HEIG), construction firm Hochtief (ETR:HOTG), and industrial services provider Bilfinger (ETR:GBFG).
The move to ease Germany’s so-called debt brake -- a key sticking point that partly led to the collapse of current Chancellor Olaf Scholz’s government late last year -- also came with a deal to create a new 500 billion-euro fund aimed at bolstering infrastructure and defense spending.
Friedrich Merz, the leader of Germany’s Christian Democratic Union and likely Scholz’s successor, is set to present a joint bill in parliament next week. Merz is currently in talks to form a coalition government after federal elections just over a week ago.
On Tuesday, Merz said the agreement between the CDU, its Bavarian sister party and Scholz’s Social Democrats was in response to recently growing fears over Europe’s defense capabilities and signs of sluggishness in the German economy -- traditionally the continent’s powerhouse.
"[T]his is a major policy shift announced before the new government had even been formed and confirms the impression that Friedrich Merz has grasped the gravity of the situation he has inherited and is prepared to act decisively and to bring his coalition partner with him," analysts at Capital Economics said in a note to clients.
Talks between the U.S. and Russia over ending the war in Ukraine have notably excluded Kyiv and its European allies, while statements from President Donald Trump have fueled concerns that Europe may no longer be able to rely on America to provide a longstanding security backstop. Leaders in Europe have subsequently ratcheted up discussions around possibly increasing their defense budgets.
The prospect of higher expenditures has pushed up the yield on Germany’s 10-year benchmark government debt.