Goldman Sachs traders pour cold water on European stocks: The "German myth" has been overplayed

With the German government announcing an unprecedented fiscal expansion plan and pledging to amend the constitution and "spare no effort" to revive the economy and strengthen national defense, market sentiment has been boosted, leading to a significant rise in European stocks. However, Goldman Sachs fixed income and currency trader Alberto Bacis warned that this European fiscal expansion trade is already "over and done," and the market will face numerous real challenges.

Currently, European bond yields are rapidly climbing, and analysts believe that this Germany-led fiscal expansion story may soon face severe tests.

Market Sentiment Turns: From "American Exceptionalism" to "European Fiscal Expansion"

Analysts pointed out that as early as January this year, the European interest rate market was almost ignored, with macro investors focused on "American exceptionalism." However, recently, as European fiscal expansion suddenly became a hot topic, investors flocked to it, mirroring the previous enthusiasm for the U.S. Bacis believes:

"Both trades have been excessive and have been pushed too high this week."

Bacis emphasized that in addition to Germany finally abandoning fiscal conservatism and preparing for significant expansion, there are two important developments this week:

The European Commission approved a new national-level defense spending leverage plan

And a small cap for joint financing through the EU will be submitted to the EU Council

The market interprets these developments as Europe is accelerating forward, with Germany leading this effort. Goldman Sachs believes that in reality, borrowing limits are determined by the credit limits allocated by major investors and global reserve funds. The market's pricing has already exceeded any reasonable probability assumptions.

Bond Yields Soar: Fiscal Expansion Faces Constraints

As bond yields surge, Bacis warned that Europe's leverage plans will face serious challenges. Data shows that the yield on Germany's 30-year government bonds has risen by 50 basis points in two weeks, while the yield on France's 20-year government bonds has increased by 35 basis points since the last medium to long-term refinancing.

"Europe is undergoing massive leverage operations. The last thing we want to see in this situation is a surge in sovereign bond yields: and that is exactly what is happening today."

Today, the yield on Germany's 10-year government bonds continued its largest single-day drop since 1990, briefly rising to 2.929%.

He predicts that three scenarios may emerge in the future:

1. Some sovereign countries may face difficulties in re-leveraging due to high financing costs, leading to a bond crash, and bond vigilantes will take action against countries with limited fiscal space and poor rating trajectories, which would be unfavorable for the euro.

2. Germany decides to use German funds to save all of Europe, providing guarantees for the national debts of other countries

3. Market sentiment has calmed down, partially retracting recent wild trends.

The current situation is automatically limiting leverage in Europe. He believes that if bond yields continue to rise like today, the spending figures announced yesterday must be reduced by 25% to reflect higher borrowing costs.

Bacis stated that due to Germany's repricing, sovereign spreads should not currently be viewed as a key risk indicator for macro sustainability; instead, attention should be focused on the absolute yield levels of sovereign bonds