European markets hit new highs at the beginning of the week, propelled by defence stocks following the start of talks between the US and Russia over the war in Ukraine.
Both the German Dax 40 and French Stoxx 600 have hit new highs over the last two days.
According to Daniela Sabin Hathorn, senior market analyst at Capital.com, the market movement has been partly driven by optimism on the geopolitical front.
“One major factor contributing to this rally is the perceived de-escalation of trade tensions. Former President Trump’s previously aggressive tariff stance appears to have softened, with the delay in implementation signalling a more strategic rather than combative approach,” she said.
“Markets, having previously braced for a worst-case scenario, are now pricing in a more measured trade environment, thus bolstering risk sentiment in global equities.”
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Meanwhile, developments in Eastern Europe have also alleviated some investor concerns, with talks beginning between the US and Russia over the war in Ukraine.
“However, the exclusion of both Ukraine and the European Union from these discussions has sparked criticism, straining transatlantic relations,” Hathorn added.
“The EU, caught off guard, is now scrambling to formulate a cohesive defence strategy in an effort to maintain influence in these crucial negotiations.
“One of the key takeaways from the Munich Security Conference over the weekend was the renewed focus on increasing military spending within NATO, particularly among European nations. This policy shift has significantly benefited European defence stocks, which have rallied sharply since Trump’s inauguration in mid-January.”
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“Global investors are rediscovering European stocks, buoyed by the optimism of an end to the economic downturn in China and the expectation that Russia’s war against Ukraine will conclude, and that Europe will need to bolster its own defense spending,” said Jochen Stanzl, chief market analyst at CMC Markets.
“Additionally, European stock valuations remain low, prompting investors to withdraw capital from the now overvalued and perfectly priced stocks on Wall Street. The result is a substantial catch-up process for European markets.”