A look at the day ahead in U.S. and global markets from Mike Dolan
Europe’s defence stocks, up almost 20% for the year so far, surged another 1% on Tuesday as U.S. officials met Russian counterparts in Saudi Arabia for talks about ending the war in Ukraine and Germany prepared to go to the polls this weekend.
U.S. markets were closed on Monday for the President’s Day holiday and are set to return in relatively buoyant mood, with stock futures firmer near record highs even with Treasury yields and the dollar ticking back higher again.
But attention has turned to Europe in what may prove to be a landmark week for the continent politically and economically, and as Europe’s broad stock indexes are drawing value investors back across the Atlantic again this year, given their near 40% valuation discount to S&P500 cousins.
Euro zone stock gains of more than 12% in dollar terms this year are almost four times that of the American benchmark, with the record high German DAX up 14%.
While rebalancing due to valuation extremes is a key driving force, the prospect of higher defence spending in Europe has added a major tailwind – with the outcome of Germany’s elections also likely to decide whether a new government in Berlin will have the two-thirds parliamentary support needed to loosen the so-called ‘debt brake’ embedded in its constitution.
Hopes for some broader rethink of public investment spending as way to rebooting the sluggish German economy have encouraged portfolio investors to revise their aversion to the region even in the face of potential U.S. trade wars.
And in the backdrop, German investor morale posted its strongest increase in two years this month, according to the ZEW economic research institute.
DEFENCE TAKES CENTRESTAGE
But defence is front and centre of the latest stock price moves, with even some renewed speculation about the EU returning to joint sovereign borrowing as a possible route to increased spending in the area.
Reflecting in part Washington’s decision to engage Russia in talks this week without either Ukrainian or European Union governments at the table, Europe’s defence sector has surged again.
German arms maker Rheinmetall added another 2% to its 14% jump on Monday, while Thyssenkrupp, looking to spin off its warship division, advanced 3% after soaring nearly 20% on Monday.
Italy’s Leonardo was up another 2%, while Sweden’s Saab rose 2.5% and Britain’s BAE Systems also gained 1%.
Leaders from major EU states and Britain met in Paris on Monday, saying they were ready to give Ukraine security guarantees but adding it was dangerous to conclude a ceasefire there without a peace agreement at the same time.
