By Naomi Rovnick and Tom Westbrook
LONDON/SINGAPORE (Reuters) -European shares hit record highs on Tuesday as defence stocks soared on expectations of a spending bump and as investors switched more cash into non-U.S. markets to avoid the inflationary pressures of trade tariffs.
The pan-European STOXX 600 index hit an all-time high of 556.81 points as a gauge of defence and aerospace stocks climbed about 1% after rallying nearly 4.6% on Monday on signs of European moves to relax military spending limits.
Wall Street’s S&P 500 benchmark stock index was set for a lacklustre session when U.S. markets re-open from a holiday break later in the day, futures trading implied, after a Federal Reserve official advocated delaying interest rate cuts.
Key measures of U.S. inflation are running at a half percentage point or more above the Fed’s goal, while anxiety about Chinese artificial intelligence competition hangs over the big tech stocks that dominate U.S. indices.
European stocks have just had their biggest weekly investment inflow since January 2023, Bank of America said, in part because Europe’s indices have heavy weightings of industrial stocks that would benefit from continuing U.S. economic growth.
“The idea is very simple: overvalued U.S. tech (and) attractive value in Europe,” Lombard Odier Investment Managers multi-asset portfolio manager Florian Ielpo said.
“That old (economy) world now looks very attractive.”
Euro zone governments’ borrowing costs rose, however, with Germany’s benchmark 10-year bond yield, which moves inversely to the price of the security, touching 2.51%, its highest since January 31.
This came after EU Commission President Ursula von der Leyen said the region would step up support for Ukraine and as the U.S. and Russia headed into bilateral talks on a prospective peace deal that Kyiv warned could not be made on its behalf.
“The pressures on Europe to substantially increase defence spending have escalated rapidly over the last week,” Deutsche Bank economist Mark Wall said in a note to clients.
The spot gold price gained 0.5% to $2,911.4 an ounce and U.S.-traded gold futures for April delivery added 0.8% to $2,923 as investment bank Goldman Sachs raised its price forecast for the yellow metal to $3,100 by the end of the year.
CHINA RALLY
In Asia, Japan’s Nikkei rose 0.5% with bank and defence-related shares taking their cues from Europe’s gains.
Chinese markets were buoyed by Monday’s rare meeting between Xi and business leaders. Hong Kong’s Hang Seng touched its highest since October and an index of tech shares hit a three-year high before some selling kicked in.