European stocks mark record closing high as defence stocks soar

By Nikhil Sharma and Johann M Cherian

(Reuters) - European shares marked a record closing high on Monday, boosted by defence stocks as investors priced in the likelihood of increased military spending in the region, following growing U.S. pressure.

The pan-European STOXX 600 index ended up 0.5% at 555.42 points, its highest ever closing level, with the aerospace and defence index leading sectoral gains with a 4.6% jump, its biggest one-day jump since Russia invaded Ukraine in February 2022.

Shares of defence companies such as Italy's Leonardo gained 8.1%, Sweden's Saab AB jumped 16.2% and Britain's BAE Systems advanced 8.9%, while German conglomerate Thyssenkrupp, which is looking to spin off its warship division TKMS, soared 19.8% to its highest in more than a year.

Arms maker Rheinmetall's shares surged 14%, also lifting Germany's benchmark index by 1.3% to an all-time high.

European Commission President Ursula von der Leyen said the Commission will propose exempting defence from EU limits on government spending, at a time when U.S. President Donald Trump has asked European members of NATO to finance the continent's own defence against a potential Russian attack.

European leaders met in Paris for an emergency summit on Ukraine after U.S. officials suggested Europe would have no role in any upcoming talks aimed at ending the conflict with Russia.

"European governments are poised to further scale up their plans for defence spending in the coming years, which should benefit the equity prices of European defence companies," said Jack Allen-Reynolds, deputy chief euro-zone economist at Capital Economics.

"As things stand we think the bulk of any additional borrowing is likely to be done by national governments rather than the EU, and this will add to fiscal pressures in countries such as France and Italy."

Keeping a lid on equities' gains, were higher bond yields as markets also priced in increased European bond issuance to fund defence spending. The yield on the German 10-year benchmark touched a two week high.

Higher yields aided the banking sector's 1% rise, which traded near a 17-year high, while rate-sensitive real estate stocks lost 0.7%.

The benchmark STOXX index logged its longest set of weekly gains since March 2024 on Friday, outperforming its all Street peers as investors entered the year by scooping up cheaply valued European stocks.

Bakkafrost dropped over 4% on Monday after the Norwegian fish farmer reported fourth-quarter results.

Oil refiner and biofuel maker Neste fell 7.8% after Inderes cut the stock's rating to "reduce" from "accumulate".

U.S. markets are shut on Monday for the President's Day holiday, keeping trading volumes in Europe lighter than usual throughout the day.

(Reporting by Nikhil Sharma and Johann M Cherian; Editing by Susan Fenton)