European indices hit record highs as defence stocks surge on NATO news

European indices rise as US markets close

With United States (US) markets closed overnight for the Presidents Day holiday, investor focus shifted to European stock markets, which posted impressive gains as key indices such as the DAX 40 and the STOXX, ripping to new highs.

Political developments

Recent developments, including US-Russia peace talks that marginalised European and Ukrainian involvement, alongside Donald Trump's call for European North Atlantic Treaty Organisation (NATO) members to fund their defence, have been a wake-up call for European leaders.

Should European leaders decide to significantly increase defence spending to the 5% of gross domestic product (GDP) level Trump demands, it could stimulate Europe's sluggish growth and boost the share price of weapons manufacturers such as Rheinmetall, SAAB, BAE Systems, Thyssenkrupp, and Thales.

Additionally, a Ukraine-Russia peace agreement could bolster European economic growth through Ukraine's reconstruction amidst lower energy prices and improved consumer confidence.

European markets lead after US election

Following Trump's victory in the US election, speculation on these issues has grown, intensifying in the new year. Consequently, stock markets have performed strongly, with some of this year's top global performers being:

• Poland: up 23.2%
• Sweden: up 17.4%
• Germany: up 14.3%
• Spain: up 12.4%
• Italy: up 11.8%

UK inflation

Date: Wednesday, 19 February at 6.00pm GMT

December's annual headline inflation edged lower to 2.5% from 2.6%. The annual core rate of inflation fell to 3.2% year-over-year (YoY) from 3.5% the previous month, below estimates of 3.4%. January's headline inflation is expected to rise to 2.8% as weakness in airfare prices is reversed, combined with the introduction of value added tax (VAT) on private school fees.

Higher services inflation is expected to see the core rate of inflation rise to 3.6% YoY from 3.2%. This should ensure the Bank of England (BoE) keeps its official bank interest rate on hold until its meeting in May.

UK core inflation rate chart

FTSE 100 technical analysis

After a robust rally to the mid-May high of 8474, the FTSE 100 then spent six months consolidating gains within a bullish trend channel before finally breaking higher in mid-January.

The move was in line with our call back in mid-December where we said: 'A sustained break above the trend line resistance at 8370 - 8390, which comes from the highs of May, August, and October, and then above a band of horizontal resistance at 8400 - 8420, is needed to confirm that the correction in the FTSE is complete, and that the uptrend has resumed towards 8600.'

With our expectation of a push towards 8600 met and exceeded, we currently hold a neutral bias in the FTSE 100 and are looking to rebuy a pullback to support at 8400 - 8380 pending signs of basing.

FTSE 100 daily chart

DAX 40 technical analysis

The rally in the DAX 40 has accelerated in 2025, boosted by the factors outlined above and signs of improvement in forward-looking growth indicators, taking the index well into overbought territory.

While we think the backdrop for the DAX and other European indices remains positive, we wouldn't be chasing the DAX at these levels. Instead, we would prefer to wait for a corrective pull in the weeks ahead with a view to being a buyer, pending signs of basing.

DAX 40 daily chart

• _{Source: TradingView. The figures stated are as of 18 February 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}