Germany Tightens Budget Despite €500 Billion Special Fund

Economic

Summary:

Germany's newly appointed Finance Minister Lars Klingbeil is urging strict fiscal discipline as the country navigates a delayed budget process, despite possessing a €500 billion special fund for infrastructure and defense....

Germany’s Fiscal Strain and Political Backdrop

Germany's budget process for 2025 is unfolding under unusual political and economic pressures. Following the collapse of the previous "traffic light" coalition in November 2024 due to irreconcilable differences over fiscal policy, the new grand coalition between the Social Democratic Party (SPD) and the Christian Democratic bloc (CDU/CSU) has inherited a complex fiscal landscape. Since the Bundestag has yet to pass a formal budget for the current year, the federal government is operating under a temporary budget that allows only essential expenditures.

Finance Minister Lars Klingbeil, also the SPD leader, is pushing for budget cuts and expenditure control, emphasizing that the existence of a special €500 billion fund should not justify complacency. "We cannot sit back just because we have a special fund for infrastructure and defense outside the debt brake," Klingbeil told dpa.

The Role of the €500 Billion Special Fund

Established through an amendment to Germany’s Basic Law (constitution), the special fund is designed to modernize critical infrastructure and boost defense spending in response to security and geopolitical pressures, including the war in Ukraine. The fund is exempt from the national debt brake, which constitutionally limits new borrowing. However, Klingbeil stressed that this fund is meant for future-oriented investment, not as a stopgap for structural budget shortfalls.

The draft federal budget for 2025 is scheduled for cabinet approval on June 25. This will be followed by a first reading in the Bundestag before the summer recess, with final parliamentary approval expected by September. Planning for the 2026 budget will also begin soon and is anticipated to conclude by the end of this year.

Klingbeil faces the difficult task of reconciling investment ambitions with constitutional debt limits and declining tax revenue projections. The most recent fiscal estimates suggest a shortfall of €33.3 billion by 2029 compared to projections made in October 2024, further fueling concerns about the sustainability of public finances.

As Germany attempts to navigate post-coalition instability and long-term structural deficits, Klingbeil’s call for austerity—even with a substantial special fund—signals a cautious approach to governance. The emphasis on not using the fund to patch budget holes underlines a broader commitment to fiscal prudence while maintaining Germany’s economic and defense commitments. The months ahead will test the coalition’s ability to strike a balance between fiscal restraint and investment in national resilience.

Source: Reuters

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Commodity

Gold Responds to U.S. Credit Downgrade with a Rally

In early trading on May 20, global gold prices climbed as investor demand for safe-haven assets surged. Spot gold rose by 0.9% to $3,231/oz, before easing slightly to $3,212/oz by 9:35 AM (Vietnam time). U.S. gold futures jumped 1.5%, reaching $3,233/oz — reflecting heightened uncertainty over U.S. fiscal stability.

Senior strategist Bob Haberkorn from RJO Futures remarked that gold remains a dependable investment in times of financial stress: “Gold will continue to be a reliable long-term asset following the downgrade. It's still a strong market for buying and holding.”

Weaker Dollar and Market Volatility Fuel Gold’s Strength

The U.S. dollar index (DXY) dropped to its lowest level since May 8, making gold more attractive for investors holding other currencies. Meanwhile, major Wall Street indices remained under pressure following the credit downgrade.

Moody’s cited the U.S.’s ballooning debt and rising interest payments — currently above $36 trillion — as reasons for its decision. The downgrade echoed growing concerns about America’s long-term fiscal path and undermined investor confidence.

New Trade War Fears Add to Gold’s Appeal

Statements by U.S. Treasury Secretary Scott Bessent further rattled markets. He reiterated that President Donald Trump would reimpose full tariffs announced on April 2 if trade partners failed to negotiate in “good faith.” This has renewed fears of a second wave of trade tensions, reinforcing gold’s role as a geopolitical hedge.

Despite the short-term volatility, Goldman Sachs reiterated its forecast that gold could hit $3,700/oz by the end of 2025 and may reach $4,000/oz by mid-2026. The forecast is underpinned by continued diversification into gold by private sector investors and persistent macroeconomic instability.

So far in 2025, gold has surged by over 23%, setting new record highs amid escalating geopolitical and economic uncertainty.

Other Precious Metals Also Climb

Spot silver rose 0.3% to $32.36/oz. Palladium increased 1.1% to $998.26/oz, and platinum climbed 1.4% to $974.50/oz. According to the World Platinum Investment Council (WPIC), platinum jewelry demand is rebounding in China, leading to deeper-than-expected market deficits this year.

In Vietnam, SJC gold was quoted at VND 116.8–119.3 million per tael in morning trading, while gold rings traded at VND 111–114 million per tael. The surge reflects both international trends and domestic demand for hedging amid macroeconomic headwinds.

With rising U.S. debt, a weakening dollar, global policy unpredictability, and the threat of trade conflicts, gold continues to assert its value as a defensive asset. As financial markets navigate Moody’s downgrade and growing geopolitical instability, investors are once again embracing gold’s age-old role as a store of value in uncertain times.

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Economic

A New Chapter in UK–EU Relations

On May 19, UK Prime Minister Keir Starmer met with European Commission President Ursula von der Leyen and European Council President Antonio Costa in London to announce a landmark agreement aimed at restoring structured cooperation between the UK and EU. This marks the most significant step in UK–EU relations since the formal Brexit process concluded in 2020.

"This is the third deal in two weeks—India, the US, and now the EU. We’re delivering for British people, British jobs, and British businesses," said Starmer on social media, promising lower food and energy costs and greater defence capabilities as part of the new framework.

EU leaders hailed the agreement as a “new chapter,” with von der Leyen calling it a “reset” in strategic partnership and Costa emphasising the strengthened joint resilience through cooperation.

Defence and Security Pact: Rebuilding Strategic Trust

One of the most notable pillars of the deal is the new Defence and Security Treaty. Amid escalating global threats and U.S. pressure under President Trump for Europe to boost defence spending, both sides agreed that deeper collaboration could no longer be delayed.

The UK committed to joining EU civil and military missions and participating in joint defence procurement efforts. British companies will now have access to the EU’s €150 billion Common Security and Defence Fund—a significant economic and strategic boost for UK defence firms such as BAE Systems and Babcock.

SPS Agreement: Reducing Friction in Food Trade

In a long-awaited move to ease post-Brexit trade headaches, the UK and EU agreed to streamline sanitary and phytosanitary (SPS) checks. This includes reducing border inspections for perishable goods like agricultural and food products, and introducing shared standards to uphold high levels of food and crop safety.

This is expected to cut logistical costs and improve the speed of goods movement, particularly benefiting UK farmers and exporters.

Fisheries and Energy: Long-Term Access and Integration

On fisheries, both parties agreed to extend reciprocal access to each other’s waters until 2038—12 years beyond the previously agreed 2026 deadline. This provides crucial long-term stability for the fishing industries on both sides of the Channel.

Energy cooperation also gained traction, with the UK expressing interest in rejoining the EU's internal electricity market. In 2024, 14% of the UK’s electricity was imported from the EU, underscoring the importance of more efficient cross-border power trading as energy security becomes a growing concern.

Broader Cooperation: From Carbon to Culture

Beyond the major headlines, the agreement opens new fronts of collaboration. These include:

Carbon market alignment to ensure coherence in climate policy

Easing visa restrictions for artists and touring professionals

Enhanced data sharing in legal and security matters

These commitments reflect a mutual recognition that Brexit-era disengagement needs to be replaced by practical alignment, especially in sectors where integration benefits both sides.

From Political Divorce to Strategic Partnership

The UK–EU agreement represents a pragmatic recalibration of relations, moving from political rupture to constructive re-engagement. While Brexit signified a formal departure, this “reset” marks a turning point: one where shared geopolitical risks and economic interdependence are pushing both sides back to the negotiating table with renewed purpose.

Rather than rekindling full membership, this deal symbolises a flexible, purpose-driven partnership—one that prioritises stability, growth, and joint resilience in an increasingly uncertain world.

Source: Tovima

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China–U.S. Trade War

Economic

U.S.–China Tariff Truce Ignites a Surge in Orders

Following a joint announcement on May 14, the U.S. and China agreed to simultaneously suspend 91% of additional tariffs and pause 24% of reciprocal duties, offering businesses brief relief from trade pressures. The immediate response was a sharp rise in U.S. imports from China as firms raced to restock inventories during the 90-day window.

Logistics firms report a rush of container bookings, with some U.S. importers preparing thousands of containers in Chinese ports. Supply chain analysts predict shipping costs from China’s ports to the U.S. West Coast may climb by 20% in the coming weeks due to rising demand. Toy makers, apparel companies, and other consumer goods retailers are rapidly placing new orders.

While larger players like Viahart and logistics firms are ramping up trans-Pacific shipments, even Chinese manufacturers and freight operators are now running on expanded shifts to accommodate the volume spike. Ports in Yangzhou and Dongguan, for instance, have reported sudden spikes in activity.

Risk Management Takes Center Stage as Uncertainty Looms

Despite the short-term boost, U.S. businesses remain wary of what will come after the truce ends in mid-August. The temporary nature of the agreement does not eliminate the risk of tariffs being reinstated or increased—especially under President Trump’s unpredictable policy shifts.

Retailers like educational toy producer Viahart and small business owners such as Mississippi-based CEO Anna Buck are hedging their bets, rushing to import stock before the truce expires. Yet they acknowledge the precariousness of relying on temporary policy relief. The current 30% tariff remains a significant burden for many small to mid-sized firms, undermining profitability and raising fears about rising consumer costs during key shopping seasons like back-to-school and Christmas.

Economic analysts, including KPMG’s Diane Swonk and CSIS’s Matthew Luck, caution that without a permanent agreement, consumer prices may rise, and long-term investment decisions will remain suspended. The possibility of another policy reversal has left many businesses in a “wait-and-see” mode.

Ripple Effects: Global Trade Partners React

The temporary easing of tensions between Washington and Beijing has immediate implications for other nations engaged in or awaiting trade negotiations with the U.S.

The European Union, for instance, while welcoming the reduced tensions, remains frustrated by the continued high level of U.S. tariffs on Chinese goods. EU Trade Commissioner Valdis Dombrovskis warned that such distortions could damage the global trading system. Meanwhile, the EU has not ruled out retaliatory tariffs if discussions with the U.S. fail to yield progress.

Japan, which has laid groundwork for trade talks with Washington, is concerned that its leverage may weaken now that U.S.–China tensions have cooled. Japanese officials fear a tougher negotiating stance from the U.S. and worry that opportunities to extract concessions might dwindle as the spotlight shifts back to bilateral demands.

India has escalated its response by lodging a formal complaint with the World Trade Organization over U.S. tariffs on its steel and aluminum exports. In a notable shift, India is preparing retaliatory duties and Trade Minister Piyush Goyal has embarked on direct negotiations in the U.S.—signaling a firmer, rule-based posture toward American protectionism.

Truce or Tactical Pause?

Although the U.S.–China tariff pause has temporarily smoothed trade flows and stabilized trans-Pacific logistics, it is far from a resolution. The economic implications for global partners are complex and dynamic. As firms leverage this temporary window to rebuild inventories, the underlying fragility of the trade environment remains.

Whether this truce evolves into a durable framework or simply postpones another round of escalations will hinge on the credibility of U.S. trade strategy, the alignment of global partners, and the willingness of both Washington and Beijing to anchor their actions in long-term mutual interest.

Source: Nikkei Asia

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Stocks

Market Rebounds Amid Lingering Global Uncertainty

Asian markets opened on a firmer footing despite a turbulent global backdrop. Moody’s recent downgrade of the U.S. sovereign credit rating, attributed to the country’s growing $36 trillion debt burden, initially roiled Treasuries but was largely brushed aside in Tuesday’s Asian session. Yields on 30-year U.S. bonds retreated slightly from an 18-month peak, calming investor nerves and lending support to risk assets across the Asia-Pacific.

The MSCI Asia-Pacific ex-Japan Index rose 0.36%, hovering near last week’s seven-month high, while Japan’s Nikkei climbed 0.65% in early trade. Chinese mainland stocks held steady following fresh monetary policy easing, and Hong Kong’s Hang Seng Index rallied 1%.

China’s Rate Cuts Add Momentum to Regional Sentiment

Investor sentiment in China was buoyed by the People’s Bank of China’s decision to reduce both the one-year and five-year loan prime rates by 10 basis points, the first such move since October 2024. In tandem, major state-owned banks cut deposit rates by up to 25 basis points, signaling a broad-based effort to ease financial conditions and stimulate credit demand.

This policy shift helped stabilize the CSI300 Index, which ticked up 0.15%, and added upward pressure to Hong Kong equities. The monetary moves underscore Beijing’s concern about lackluster domestic consumption and weak property market trends, even as it navigates ongoing friction with Washington over trade.

Investors Weigh Trade Stalemate and U.S. Fiscal Outlook

Despite the temporary truce on tariffs announced earlier this month, there has been no major progress in finalizing new trade deals. Analysts warn that without clear breakthroughs, markets may lack directional conviction. According to Saxo Bank’s Charu Chanana, the resilience of U.S. corporates and economic data may currently offset debt concerns, but investor patience could wear thin if policy clarity does not improve.

U.S. equities closed flat on Monday, and the U.S. dollar drifted lower as Treasury yields steadied. The Federal Reserve continues to adopt a cautious tone, with Vice Chair Philip Jefferson emphasizing a wait-and-see approach. Meanwhile, the debate over Trump’s proposed extension of the 2017 tax cuts—legislation that could add $3–5 trillion to the national debt—is intensifying. Markets are watching closely ahead of the House vote expected later this week.

Traders have already scaled back expectations of Federal Reserve rate cuts in 2025, from four in April to two currently, as markets digest the Fed’s caution and the inflationary risk from expansionary fiscal policies and erratic trade measures.

Broader Impacts: RBA, Commodities, and Currency Volatility

The Australian dollar weakened slightly to $0.64485 ahead of a policy decision from the Reserve Bank of Australia, with markets broadly expecting a rate cut. If delivered, it would further align Australia with global trends toward looser monetary policy, particularly as growth projections soften.

Commodities showed mixed performance. Oil prices were volatile as geopolitical tensions flared over U.S.-Iran nuclear negotiations. Investors are concerned that faltering talks may delay the reintroduction of Iranian oil supply into global markets, potentially exerting upward pressure on crude prices in the medium term.

Calm Amid Uncertainty, But for How Long?

Markets in Asia appear to be entering a tentative phase of stability following major shocks in U.S. fiscal policy and Chinese trade dynamics. However, with no concrete trade agreements yet secured and ongoing fiscal expansion in Washington raising long-term concerns, global investors may soon demand higher premiums for risk. The next inflection point will hinge on progress—or lack thereof—in both trade negotiations and domestic policy debates in the U.S., setting the tone for risk appetite heading into the second half of 2025.

Source: Reuters

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Economic

PBOC Launches Coordinated Monetary Easing Effort

On May 20, the People’s Bank of China (PBOC) implemented a long-anticipated monetary easing policy, cutting the one-year loan prime rate (LPR) by 10 basis points to 3.0% and the five-year LPR to 3.5%. These reductions come alongside synchronized cuts in deposit rates by China’s largest state-owned banks, including ICBC, Bank of China, and China Construction Bank, marking a broad effort to reduce borrowing costs while safeguarding bank profit margins.

The one-year LPR governs most new and outstanding loans, while the five-year rate primarily affects mortgage costs. Taken together, the adjustments aim to inject momentum into sluggish credit demand, encourage consumer spending, and revive sectors like housing and small business lending.

Deposit Rate Reductions Signal Deepening Policy Commitment

Alongside lending rate cuts, state banks also reduced deposit interest rates by 5 to 25 basis points across various tenors. The one-year time deposit rate now sits at 0.95%, while three- and five-year deposit rates were lowered by 25 basis points.

These reductions signal Beijing’s intent to give banks more room to lower loan rates without hurting margins. By guiding smaller banks to follow suit, the PBOC is effectively reshaping the country’s interest rate structure from both sides of the balance sheet, aiming to reignite borrowing without destabilizing the banking system.

Trade Truce Offers Temporary Relief But Not Structural Fix

This round of easing comes in the wake of a 90-day truce between China and the United States on tariffs. Announced earlier this month in Geneva, the agreement temporarily lowers U.S. tariffs on Chinese goods from 145% to 30%, while China reciprocated by reducing its duties from 125% to 10%. While the pause offers near-term relief, it does not eliminate the long-term drag of trade uncertainty on China’s investment climate.

Some analysts argue that the de-escalation reduces immediate pressure on Beijing to launch large-scale stimulus. Nomura’s chief China economist Ting Lu warned, however, that without “sizable stimulus and structural reforms,” hitting the government’s “around 5%” growth target will remain elusive.

Economic Data Signals Patchy Recovery

Recent macroeconomic indicators show China’s recovery remains uneven. April’s home price index showed no month-on-month growth, continuing a nearly two-year stagnation in the housing market, despite repeated attempts by policymakers to stabilize it. Similarly, new bank loans dropped more than expected in April, indicating continued weak demand for credit.

While global investment banks have marginally revised upward their growth forecasts following the tariff truce, the underlying structural problems—consumer caution, weak private investment, and overcapacity in real estate—remain largely unaddressed.

China’s latest rate cuts represent a tactical move to ease financial conditions and buy time amid economic headwinds and geopolitical uncertainty. However, with only modest policy adjustments so far, and the risk of prolonged global trade disruption still lingering, Beijing faces a narrowing path to achieving its 2025 growth goals. Without deeper reforms or bolder fiscal initiatives, these incremental monetary actions may offer limited relief in what continues to be a fragile post-pandemic recovery.

Source: Reuters

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Stocks

A Blockbuster Debut Amid Shifting Global Sentiment

Contemporary Amperex Technology Co. Ltd. (CATL), the world’s leading electric vehicle battery manufacturer, launched its long-anticipated Hong Kong listing on a high note, with shares opening at HK$296—well above the HK$263 issue price. The company raised $4.6 billion, making it the largest global IPO of 2025 to date, and a potential green shoe option could lift proceeds to $5.3 billion.

This successful debut underscores a robust appetite for Chinese technology and green energy equities, especially amid signs of easing trade tensions. CATL’s dual listing, which supplements its existing Shenzhen presence, is strategically aligned with its ambitions to cement a dominant role in global EV supply chains.

Investor Demand Surges Despite Geopolitical Risks

The listing was massively oversubscribed, with the institutional tranche covered 15.2 times and the retail portion a staggering 151 times, as disclosed in CATL’s filings. Despite prior concerns that U.S. institutional investors might be restricted from direct participation, many gained exposure through offshore accounts.

The strong order book was bolstered by the timing of a U.S.-China trade truce. The temporary agreement—reducing U.S. tariffs on Chinese goods from 145% to 30%, and China’s tariffs on U.S. imports from 125% to 10%—was announced just one day after CATL opened its bookbuild. The de-escalation appeared to spur long-only global investors who had initially abstained from bidding to enter the market late.

Strategic Expansion Fuels Investor Optimism

CATL plans to allocate a significant portion of its IPO proceeds toward building a new battery plant in Hungary, as part of its expansion into the European EV supply chain. This aligns with supply agreements already in place with global automakers including BMW, Stellantis, and Volkswagen.

The company’s net profit for Q1 2025 rose 32.9% year-on-year to 14 billion yuan ($1.91 billion), marking its fastest earnings growth in nearly two years. Meanwhile, it expanded its global market share in the EV battery sector to 38% in 2024, up from 36% a year earlier, according to SNE Research. This expansion reflects both technological leadership and operational scalability.

CATL Founder and Chairman Robin Zeng positioned the listing as a milestone toward deeper capital market integration and a broader push toward a global low-carbon economy.

Broader Implications for China’s Capital Markets

The success of CATL’s Hong Kong IPO is more than a corporate win—it signals a renewed window of opportunity for Chinese companies seeking global capital amid complex geopolitical dynamics. Investor appetite appears resilient, even as regulatory and trade-related headwinds persist.

CATL’s performance also revitalizes Hong Kong’s IPO landscape, which has seen diminished activity amid rising U.S.-China tensions and domestic economic headwinds. This listing follows a similar-sized 2024 debut by Midea Group, but it is the largest since Kuaishou Technology’s $6.2 billion raise in 2021.

A Vote of Confidence for Chinese Innovation

CATL’s successful Hong Kong debut reflects growing investor confidence in China’s high-tech and green sectors, even as trade tensions remain unresolved. With strategic global expansion plans and surging profitability, the battery leader’s IPO marks not only a significant capital market milestone but also a broader endorsement of China’s evolving role in the global clean energy transition. As U.S.-China tariff negotiations continue, CATL’s listing offers a clear signal: investors are betting that the future of EVs—and the capital markets supporting them—will be increasingly transnational.