European stocks surged to record highs as defense shares soared, driven by expectations of increased military spending. Investors also shifted more funds into non-U.S. markets to sidestep the inflationary impact of trade tariffs.
The pan-European STOXX 600 index (.STOXX) climbed about 1%, building on a nearly 4.6% rally from Monday. This upswing comes amid signals that Europe is moving to ease military spending limits, coinciding with President Donald Trump’s push for NATO members to boost defense contributions.
Defense companies saw significant gains, with Italy’s Leonardo—maker of the Eurofighter Typhoon jet—rising over 5%. Germany’s Rheinmetall and France’s Thales also posted strong increases.
European companies largely avoided the broader selloff in emerging markets on fears that the global economic slowdown is spreading. Shares in Danish shipping giant Maersk jumped 6.3% after reporting profit that beat forecasts. The benchmark FTSE 100 (FTSE: FTSE) was flat at 6,321. Shares in oil refiner Neste rose nearly 4% after rating agency Inderes downgraded the stock to “reduce” from “accumulate.”
Investors were also on guard for further developments on the trade front. ECB board member Piero Cipollone warned that the U.S. administration’s plan to impose tariffs on all Chinese imports could harm Europe, which heavily depends on China for exports.
A gauge of defense and aerospace stocks jumped almost 2%, taking it to its highest level in more than a week as investors took heart from hopes that the Ukraine crisis will be resolved soon. Defense companies have surged since Russia’s full-scale invasion of Ukraine in February 2022, with investors betting that the conflict would prompt governments worldwide to spend more on fortifying their forces.
The yen gained against most of its Group-of-10 peers on the currency market after data showed that Japan’s economy grew faster in nearly two years. The yen’s rise fueled speculation that the Bank of Japan may be ready to step up its stimulus efforts at its next policy meeting.
Yields on eurozone government bonds dropped, aided by the uncertainty that the U.S. could announce tariffs on European autos and parts. Automakers led the broader market lower, with shares in Volkswagen AG and Stellantis NV falling more than 4.5%. The autos and auto parts subindex ended down 2.4%.
Other movers included Danish fish farmer Bakkafrost, which plunged 7.5% after Inderes cut the stock to “reduce” from “accumulate.” Oil giant BP slipped 0.7% as its quarterly profit fell more than expected. HSBC jumped 3.1% after it launched a $2 billion buyback while banking giant BBVA rose 1.8%. Shares in French semiconductor materials maker Soitec slipped 30% after it lowered its sales outlook for 2025. The company said it was battling a tough market and pricing pressures in its core markets. The euro rose to a one-week high against the dollar. Compared to the yen, it rose by about 0.8%.