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By Jamie McGeever

ORLANDO, Florida, March 5 (Reuters) -

TRADING DAY

Making sense of the forces driving global markets

It was another wild ride on the global market rollercoaster for

investors on Wednesday, but this time it was a mostly thrilling

rather than terrifying experience. Unless they were 'long' the

U.S. dollar or German bonds.

European stocks and the euro surged on news that fiscally

conservative Germany is preparing a historic defense and

infrastructure spending splurge that could be worth 20% of its

GDP. Wall Street then got in on the act, lifted by U.S. service

sector figures and after the Trump administration postponed

tariffs on auto imports from Canada and Mexico.

In Asia, meanwhile, China confirmed it will ramp up stimulus

this year to ensure its 5% growth target is met. This will widen

the budget deficit out to a record 4% of GDP. Government

spending is back in vogue, which is a good thing, right? More on

that below.

Markets breathed a huge sigh of relief on Wednesday,

reflected in the rally in risky assets. But the dollar sank

again - it is now down year-to-date against all its G10

counterparts, even the Canadian dollar - and German bond yields

rose by a record amount.

As long as Washington's chaotic 'on-off, on-off' tariff

policy persists, a fog of nervous uncertainty and heightened

volatility will hang over markets. But Wednesday was a brighter

day.

Today's Key Market Moves

* German stocks have their best day in as much as

three

years, with the benchmark Dax rising 3.4% and the midcap MDax

index surging 6%.

* Germany's 10-year yield explodes 30 basis points, its

biggest

rise since before the euro was launched in 1999.

* The euro rises more than 1% for a third day in a row,

something

it hasn't done for almost a decade.

* U.S. stocks jump - Wall Street's three main

indices rise

more than 1% - as the Trump administration delays auto tariffs

on Canada and Mexico.

* Emerging market FX jumps, led by a 2% spike in the

Brazilian

real as local markets re-open after Carnival holiday.

Maybe government spending isn't so bad after all

It has been an extraordinary 24 hours for government spending.

Germany has given the green light for an unprecedented

fiscal splurge worth 1 trillion euros that has been warmly

welcomed by the market, at the same time investors are becoming

increasingly anxious about the tightening purse strings on the

other side of the Atlantic.

This fiscal binge is coming not during an economic crisis

like the pandemic recession in 2020, the Global Financial Crisis

of 2008 or euro zone debt crisis in 2011-12. German growth may

have ground to a halt, but there is no economic panic.

The fiscal taps are being opened, in large part, because of

a shifting geopolitical order, as President Donald Trump's

ambivalence toward the continent has exposed Europe's security

vulnerabilities.

In response, Germany's likely incoming Chancellor Friedrich

Merz has proposed the biggest spending spree since reunification

in 1990. Defense and infrastructure outlays could amount to

roughly 1 trillion euros, or 20% of GDP, and Berlin is also set

to relax its 'debt brake' fiscal rule that has long hampered

government expenditure.

There are several layers of irony in the stunning proposals

from Germany, which has long been synonymous with

inflation-fearing fiscal conservatism at home and vehement

opposition to perceived budgetary 'indiscipline' across the euro

zone.

But Berlin's shackles are off, and governments across Europe

are likely to follow suit, increasing spending on defense and

other sectors, giving the region an even greater fiscal boost.

US ON OPPOSITE PATH

The approach to public spending is quite different in

Washington, where Trump has given Elon Musk carte blanche to

take a chainsaw to the U.S. federal budget. Private sector good,

public sector bad.

Treasury Secretary Scott Bessent insists that the seemingly

robust U.S. economy is "brittle" under the surface because GDP

has been artificially enhanced by the previous administration's

fiscal largesse.

And on Sunday, Commerce Secretary Howard Lutnick said

government spending has historically "messed" with GDP and

should be stripped from GDP figures altogether. This would be a

complete rejection of standard practice since the 1940s, but

given some of the Trump administration's other radical

proposals, it's certainly possible.

While Lutnick's comments are probably ill-advised, Bessent

may have a point. Total government spending in 2023 and 2024,

including federal, state, and local government, rose 3.9% and

3.4%, respectively, meaning it did play a large role in helping

the U.S. achieve real GDP growth of 2.9% and 2.8%, respectively,

in the past two years.

But even if this growth was supported by fiscal spending, it

was still strong and has helped keep unemployment anchored near

its lowest levels in over half a century.

THUMBS UP

How are markets reacting to the news from Berlin? They're

loving it.

Germany's Dax leaped 3.4% on Wednesday for its best day in

nearly two and a half years, and the euro's rise brought its

gains this week close to 4%. A host of global investment banks

have raised their euro forecasts and upgraded their outlook for

German and euro zone growth.

True, with a budget deficit of under 3% of GDP and debt

worth 63% of GDP, Germany has far more 'fiscal space' than the

U.S., with its 6% deficit and 120% debt.

The positive equity and currency market reaction to Berlin's

moves makes sense, although soaring euro zone bond yields and

negative swap spreads point to some investor caution around the

spending splurge.

But overall, markets are showing that government has an

important part to play in making growth great again.

What could move markets tomorrow?

* ECB policy decision, ECB president Christine Lagarde's

press

conference

* China trade figures (February)

* U.S. trade figures (January)

* Fed Governor Christopher Waller speaks at WSJ event in New

York

* U.S. Treasury Secretary Scott Bessent speaks at The

Economic

Club of New York

If you have more time to read today, here are a few articles

I recommend to help you make sense of what happened in markets

today.

1. Haven no more? Dollar 'smile' looks lopsided:

Mike Dolan

2. Spending U-turn puts Germany back in Europe's

driving

seat

3. Trump administration disbands two expert panels

on

economic data

4. Euro surge has traders burning parity bets as

Europe

ramps up spending

5. Markets wrestle with Trump's unconventional debt

ideas

I'd love to hear from you, so please reach out to me with

comments at . You can also follow me at [@ReutersJamie and

@reutersjamie.bsky.social.]

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.

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(Writing by Jamie McGeever; Editing by Bill Berkrot)