European equities hit record highs as defence shares soar

General market commentary

European markets reached record highs on Monday, buoyed by a significant surge in defence shares, which rose on expectations of increased spending driven by the ongoing security needs in the wake of the Ukraine conflict. The pan-European STOXX 600 index saw a 0.5% increase, with defence and aerospace stocks hitting lifetime peaks, reflecting strong investor confidence in the sector’s future earnings. The optimism extended to broader markets, which analysts believe could bring positive economic growth impulses to Europe, including lower energy prices and improved consumer confidence.

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Most Asian equities advanced on Tuesday, with Chinese technology shares rallying ahead of key earnings reports, while Hong Kong’s Hang Seng surged 2% on the back of strong AI-driven gains. Australian stocks fell following the Reserve Bank's rate cut, as investors took profits, and concerns lingered over slower economic growth amid weak demand for exports and sluggish consumer spending.

European markets are set to open higher, with defence stocks continuing their strong performance, driven by expectations of increased spending amid the ongoing Ukraine conflict. Meanwhile, US futures have edged up slightly, as investors remain cautious about trade tensions and the outlook for prolonged high interest rates, with attention focused on upcoming data and geopolitical developments.

The US dollar strengthened on Tuesday, rising above 106.8, as Federal Reserve officials indicated caution regarding interest rate cuts, keeping the focus on controlling inflation. Against the euro, the dollar held steady, with the single currency trading at 1.0457, reflecting the market’s uncertainty ahead of upcoming US economic data and the release of FOMC minutes.

Oil prices saw a slight dip in Asian trading this morning due to supply concerns following a Ukrainian drone attack on a Russian crude-pumping station and reports that OPEC+ may delay plans to restore output. Caution in the market was further driven by fears of oversupply, potential US tariffs, and the uncertain outlook surrounding a possible peace agreement between Russia and Ukraine.

Equities on the move

The following companies experienced moves in their share price driven by analyst ratings, quarterly earnings, or other news:

BHP reported a 23% drop in first-half profit to $5.08 billion, its lowest in six years, citing weaker iron ore prices and disruptions from cyclones, but pointed to signs of economic recovery in China and a rebound in steel and copper demand due to global monetary easing. While the company refrained from acquisitions, focusing on organic growth, it remains cautious about potential trade tensions, with its copper division performing well amid strong demand and price support.

Jefferies raised its price targets for Alibaba, Tencent, and Baidu, driven by the growing impact of AI advancements and cloud expansion. The brokerage highlighted Alibaba Cloud’s efficiency in AI, Tencent’s integration of DeepSeek-R1, and Baidu’s ERNIE model expansion, maintaining a "buy" rating on all three. Jefferies also noted that Chinese internet stocks remain undervalued compared to global peers, increasing its valuation multiples for Tencent and Alibaba Cloud businesses.

Stifel has raised its price target for Rheinmetall to €1,037, citing the expected surge in NATO defence spending and the company's dominant position in the land systems sector. With potential increases in European military budgets and a rising need for ammunition replenishment, Stifel remains bullish on Rheinmetall, projecting significant growth despite some potential risks.

Wolfe Research downgraded Robinhood Markets to "Peer Perform" from "Outperform" due to concerns over valuation and rising competitive risks, particularly from financial giants like Fidelity and Schwab. Analysts noted that while Robinhood has a path to $2+ EPS by 2026, the stock's current valuation at 30x that estimate suggests limited upside potential.

Upcoming data and events

Today's economic calendar features UK job data, Germany's ZEW Survey, and US reports on Empire Manufacturing and the NAHB Housing Market Index, while earnings reports are expected from notable companies including Arista Networks, Occidental Petroleum, Baidu, and Capgemini.

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