European Markets Rally on Tariff Compromise Hopes and German Fiscal Boost

European stock markets surged on Wednesday as investors rallied on expectations that a compromise on U.S. trade tariffs may be in the offing, while strong policy moves in Germany to boost defense spending further lifted sentiment. At 06:20 ET (11:20 GMT), Germany’s DAX climbed 3.4%, France’s CAC 40 gained 2%, and the UK’s FTSE 100 advanced 0.5%.

The rally comes amid growing hopes for a tariff compromise following President Trump’s decision to impose new tariffs—25% on imports from Canada and Mexico, and an additional 10% on Chinese goods. Although these measures have sparked retaliatory actions from the affected countries, U.S. Commerce Secretary Howard Lutnick suggested on “Fox Business” that Trump will “probably” announce compromise deals with Canada and Mexico soon, potentially easing the trade dispute.

In Germany, the positive sentiment was reinforced by news that political parties involved in forming the next government have agreed to overhaul borrowing rules. They plan to create a €500 billion infrastructure fund and relax fiscal restrictions to support a significant boost in defense spending. Analysts at Morgan Stanley noted that the overall package, which could exceed €1 trillion, poses upside risks to growth expectations.

Several German industrial stocks benefited from the news. Shares of Heidelberg Materials rose 13%, Bilfinger jumped 24%, Hochtief advanced 14%, and defense manufacturer Rheinmetall gained 4%.

On the broader economic front, a survey indicated that the eurozone economy remained largely static in February. The final composite Purchasing Managers’ Index for the region, compiled by S&P Global and viewed as a gauge of overall economic health, held steady at 50.2. This reading, which barely exceeded the growth-contraction threshold, underscores ongoing challenges in the manufacturing sector despite modest expansion in services.

Market participants are also awaiting the ECB’s next policy decision, with expectations that it will cut rates by 25 basis points—reducing the key rate to 2.50%—in an effort to stimulate an economy that has been stagnant for nearly two years.

Corporate earnings further bolstered market sentiment. German sportswear giant Adidas saw its shares rise by just over 1% after reporting a robust 19% increase in fourth-quarter sales, despite projecting slower profit growth in 2025 amid the loss of significant Yeezy-related sales. French planemaker Dassault Aviation also reported higher full-year sales, with its stock climbing 2% as geopolitical tensions and increased defense spending provided support.

Investors remain cautious but optimistic as they balance trade policy uncertainties with positive fiscal and corporate developments across the region.