By Sagarika Jaisinghani and Allegra Catelli

(Bloomberg) — The euro (EURUSD=X) climbed and Germany’s benchmark stock gauge advanced after a win by conservative leader Friedrich Merz in Sunday’s elections opened the way for a pivot to increased spending.

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Investors are betting Merz’s government will loosen an era of tight fiscal policy in Germany, giving an economy that was once Europe’s growth engine a much-needed spur. While the far-right Alternative for Germany, or AfD, doubled support to become the second-strongest party with 20.8%, it fell short of a blocking minority on its own.

The DAX Index (^GDAXI) climbed 0.8% in early trading, while the MDAX (^MDAXI) Index of mid-caps rose 1.6%. The euro strengthened against all its Group-of-10 peers, rising as much as 0.7% versus the dollar. German bonds dipped slightly at the open on the prospect of more debt sales.

“It’s a relief that it’s not going to be as messy as it could have been,” said Frederique Carrier, head of investment strategy for RBC Wealth Management in the British Isles and Asia, who added that Merz’s “business background,” will be welcomed by markets. “There’s renewed hope that things will start to move forward once the coalition is in place,” he said.

The new regime’s policy decisions are seen as crucial as the nation grapples with stagnant growth amid tariff threats from US President Donald Trump and the fallout of Russia’s war in Ukraine.

Ahead of the election, assets had already started to price in the prospect of a result that supports further borrowing.

German bonds are down versus key benchmarks, with longer-maturity securities falling more than shorter-dated ones and pushing the yield curve to its steepest since 2022. Additional borrowing tends to weigh more on longer tenors.

Debt Brake Bets

Meanwhile, the DAX stock gauge has been hovering near a record, driven by hopes that a new government would push through much-needed economic reforms and loosen strict borrowing rules, known as the debt brake.

“Key implications of the election outcome as it stands are political stability and more fiscal spending,” said Wolf von Rotberg, an equity strategist at Bank J. Safra Sarasin. That “would likely be welcomed by markets,” he said.

The euro’s gains were at least partly driven by expectations Merz won’t take too long to form a government, which wasn’t the consensus among currency traders ahead of the vote.