(Sharecast News) - European shares rallied strongly on Wednesday as investors reacted to news that Germany's political parties had done a deal to exempt defence spending from its debt brake mechanism sending the DAX index 3.59% higher.
The pan-regional Stoxx 600 index was up 1.38% at 558.38 in early deals after recording its worst day since August 2024 on Tuesday as US. President Donald Trump's new 25% tariffs on imports from Mexico and Canada took effect.

Sentiment was also lifted on news that Ukraine was ready to sign a minerals deal with the US, signalling potential moves towards a ceasefire in the war with Russia.

Germany's CDU/CSU alliance and their likely coalition the SPD said they would try to loosen constitutional rules on increasing debt to allow for higher defence spending.

They proposed three major changes to the debt brake - which limits new borrowing to 0.35% of GDP. First, a €500bn special purpose vehicle for infrastructure investment, of which €100bn will be allocated to the federal states; a reform of the debt brake to exempt any defence spending over and above 1% of GDP and reform of the brake at state level to raise their net borrowing cap from to 0.35% of GDP from zero currently.

The news saw the yield on German 10-year bonds jump almost 18 basis points to 2.66%

Shares in German firms dominated the main risers on the Stoxx. Construction firm Hochtief was up almost 14%, with manufacturer Kion Group 17% higher, chemicals maker Lanxess more than 14%, IT group Bechtle 15.4% and Heidelberg Materials 14.5%.

Adidas fell after the sport retailer forecast sales growth slowing slightly to up to 10% in 2025.

In economic news, wholesale inflation across the eurozone accelerated to a 22-month high in January, according to data out on Wednesday from Eurostat, with price pressures picking up across most major categories.

The producer price index for the single-currency region rose by 0.8% over the month, marking the fourth straight month of industrial price increases. This was above the 0.5% growth seen in December and the consensus forecast of 0.5%.

Meanwhile, the final reading of a HCOB/S&P Global private-sector eurozone survey was unchanged from the initial estimate released two weeks ago, showing that growth across the region held steady in February.

The composite purchasing managers' index remained at 50.2 for the second straight month, representing relatively subdued growth (just 0.2 percentage points above the stagnant level of 50.0) as an expansion in the services sector was "almost fully eaten up by the recession in the manufacturing sector", according to Cyrus de la Rubia, chief economist at HCOB.

Reporting by Frank Prenesti for Sharecast.com

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