European Stocks Surge with Germany's Historic Debt Deal

German shares led a rise in European stocks after a historic debt deal was reported. The STOXX 600 index gained significantly, driven by banks and defense stocks. Germany's DAX recovered losses as Chancellor-in-waiting Friedrich Merz reached a borrowing agreement. Investors remained cautious over U.S. tariffs and European-U.S. trade tensions.

European stocks rallied broadly on Friday, spearheaded by German shares following reports of a groundbreaking state borrowing deal in Germany, the region's largest economy.

The pan-European STOXX 600 climbed by 0.8%, with strong performances in banks and defense stocks, rising 1.9% and 2.9% respectively. Germany's DAX increased by 1.9%, bouncing back from earlier losses this week. The negotiations, involving conservative Chancellor-in-waiting Friedrich Merz and the Greens, led to a significant borrowing agreement pending parliamentary approval next week.

Despite the market upswing, the STOXX 600 remained on track for its largest weekly drop of the year, triggered by U.S. President Donald Trump's inconsistent tariff policies, which fueled fears of a slowdown. Concerns were further amplified by Germany's unexpected inflation drop, pointing towards possible policy easing by the ECB and a developing situation in Portugal with potential early elections.

(With inputs from agencies.)