The Impact of Fiscal Stimulus on Markets and Economies

Just as anabolic steroids are to bodybuilders, fiscal and monetary stimuli have been the lifeline for markets and the economy. Over the decades, nation-states have relied heavily on these fiscal injections to buff up markets and respective economies.

Now, to the delight of BTC and risk asset bulls, China, the world’s second-largest economy, and Germany, a heavyweight in the European Union, have announced fresh fiscal measures. This news may help calm both crypto and traditional market nerves concerning the potential negative impacts from the Trump administration’s plans to reduce spending and implement tariffs.

The National People’s Congress opened in Beijing today, aiming for a 5% GDP growth target for 2025 while raising the fiscal deficit target to 4% of GDP, a full 100 basis points higher than last year’s target of 2%.

“An increasingly complex and severe external environment may exert a greater impact on China in areas such as trade, science, and technology,” Premier Li Qiang stated in his speech.

Notably, this plan prioritizes boosting domestic demand and consumption, aligning with Beijing’s long-term goal of adopting a more consumer-driven growth model rather than an investment-driven approach.

The decision to maintain the 5% growth target indicates that “policymakers continue to have confidence in stabilizing growth despite stronger external headwinds,” according to ING.

Meanwhile, earlier this week, Germany announced it would unlock hundreds of billions of euros for defense and infrastructure investments, moving away from its traditional fiscal discipline.

“The massive shift in fiscal policy likely gives the struggling German economy a shot in the arm. An increase in defense spending may provide a cyclical boost, while the proposed infrastructure package could yield significant output gains in the long run,” Bloomberg economists suggested.

Asian and European equity markets rallied today, celebrating the fiscal announcements from China and Germany. Bitcoin also rose nearly 3% to $90,000, having defended the 200-day average on Tuesday.

Aside from potentially counteracting any fiscal tightening in the U.S., the fiscal plans from China and Germany could influence the foreign exchange market by applying pressure on the dollar.

When a country increases its borrowing, bond supply typically rises, putting downward pressure on bond prices and pushing yields higher. This, in turn, enhances the attractiveness of the domestic currency.

In fact, Germany’s 10-year bond yield has increased by 36 basis points to 2.73% since February 25, reaching its highest point since November 2023, according to TradingView. Consequently, the spread between U.S. and German 10-year government bond yields has decreased to 1.49%, the lowest since September and down significantly from the 2.31% high in December.

The narrowing yield spread has bolstered the EUR/USD, the most liquid forex pair, leading to a broad-based selling of the USD and pushing the dollar index below 105.00 for the first time since November.

Weakness in the dollar, a global reserve currency, tends to loosen financial conditions worldwide, encouraging increased risk-taking in financial markets.