European markets rise as geopolitical uncertainty lingers; defense stocks continue rally

Russian and U.S. officials ended their first formal meeting in years on Tuesday, after more than four hours of laying the groundwork for talks to end the war in Ukraine.

The meeting between U.S. Secretary of State Marco Rubio and Russian Foreign Minister Sergei Lavrov began earlier Tuesday morning in Saudi Arabia and marked the first formal sit-down meeting between top U.S. and Russian diplomats since January 2022, when then-Secretary of State Antony Blinken and Lavrov met in Geneva just weeks before Russia invaded Ukraine. 

U.S. Envoy Steve Witkoff and National Security Adviser Mike Waltz participated in the talks, while Lavrov was accompanied by Kremlin Aide Yury Ushakov, according to Russian state media.

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— Holly Ellyatt

Oil major TotalEnergies and industrial chemicals giant Air Liquide have announced joint venture plans amount to 600 million euro ($627 million) to lower emissions from European refineries.

The two French firms will develop two projects in the Netherlands that will generate 45,000 tons of green hydrogen produced using wind power.

The electrical energy for the electrolyzes will be sourced mostly from the OranjeWind offshore wind farm, which is co-developed by TotalEnergies and German energy firm RWE, the companies said.

RBC Capital Markets analysts said that an EU initiative expected to be announced next week could slash costs for hydrogen production equipment by 60%, making the deal attractive.

“Despite a weak investor sentiment into the space, a number of sizeable green H₂ projects are going ahead, driven by refining decarbonisation, which offers the best use case for green H₂ at present,” said RBC analyst Erwan Kerouredan. “Regulatory support will remain a critical factor to make economics viable, including for that project, with parties looking to secure sufficient public and national subsidies.”

“We see this as positive for sentiment for the electrolyzer manufactuers,”  the RBC analyst added.

— Ganesh Rao

Shares of Capgemini were 8% lower in early afternoon trade, hitting the bottom of Stoxx 600 movers, after the technology consultancy group reported a 1.9% dip in full-year revenue and cautious growth outlook.

The decline put the stock on course for its sharpest decline since March 2020, according to LSEG data.

Group CEO Aiman Ezzat said client demand was supporting the company’s cloud and data and AI services business, but that the company was “cautious in this uncertain environment,” particularly in manufacturing and Europe. Capgemini forecast first-half 2025 constant-currency revenue growth in the same range as the fourth-quarter of 2024.

Analysts at Citi said the company “delivered disciplined execution” with fourth-quarter revenue above consensus, but noted that the revenue growth outlook was below market expectations.

“We do believe the outlook also reflects start-of-the-year conservatism, after a softer than expected demand evolution in 2024,” they wrote.

— Jenni Reid

Yields on European government bonds moved higher on Tuesday, as investors continued to monitor geopolitical developments out of the region.

The yield on 10-year German bunds was up by 2 basis points at 9:49 a.m. London time, while yields on French and Italian 10-year government bonds rose by 1 basis point.

Yields on the U.K.’s 10-year government bonds, known as gilts, were up by almost 4 basis points on Tuesday morning. Gilt yields have experienced volatile moves in recent months, amid ongoing economic uncertainty. On Tuesday, new data showed U.K. wage growth remained hot in the final months of 2024, while the unemployment rate held steady at 4.4%.

— Chloe Taylor

Average U.K. private sector pay excluding bonuses jumped 5.9% year-on-year in the three months to December, data from the Office for National Statistics showed Tuesday.

Average earnings, exclusive of bonuses, rose by 5.6% on an annual basis in the previous quarter.

Economists said the figures gave credence to the Bank of England’s “gradual and careful” approach to easing monetary policy.

“Stagflation fears continue to stalk the UK economy as hot wage growth limits the dose of monetary medicine the Bank of England will likely be able to administer,” Jack Kennedy, senior economist at recruitment platform Indeed, said in a note on Tuesday.

Ashley Webb, U.K. economist at Capital Economics, said in a separate note on Tuesday morning that the data “will provide a bit of encouragement for the Bank to continue with its gradual approach to interest rate cuts.”

— Chloe Taylor

Shares of U.K. auto finance lenders continued their decline on Wednesday, a day after the Supreme Court rejected the U.K. government’s attempt to intervene in the motor finance scandal.

Shares of Close Brothers, Secure Trust Bank, and Vanquis Banking Group, formerly Provident Financial, began trading in the red after the decision by the U.K.’s highest court raised the uncertainty over billions in liability for the sector.

The government was worried that a lower court’s decision in October would impose heavy costs on lenders for car loans issued over many years, and potentially lead to withdrawal of credit for the sector. The Treasury Department had attempted to intervene in the case to limit losses for lenders and cap redress values for consumers.

In its 2024 ruling, Britain’s motor finance sector was found by the Court of Appeal to have “hidden” commissions for auto loans, in what could transpire to be one of the U.K.’s costliest consumer banking scandals.

Close Brothers and Secure Trust Bank stocks also fell by more than 8% on Tuesday, while Vanquis shares declined by 6.6%.

Lloyds Bank Group, one of the U.K.’s largest lenders, is also estimated to be on the hook for £4 billion ($5 billion) by analysts at Jefferies, while JPMorgan analysts believe the issue is likely to sit as an “overhang” on affected stocks until it is resolved.

“We view the rejection of the UK Treasury as a negative which we had highlighted as a key risk last…, especially given Chancellor Reeves’ comments in mid-Jan which had seemingly de-risked the extreme downside scenarios and driven share price out-performance for exposed players,” JPMorgan’s banking sector analyst Kian Abouhossein had said in a note to clients on Jan. 18.

— Ganesh Rao

Stocks tied to the regional defense sector were bolstered on Tuesday as investors continued to monitor developments on the Ukraine war and European military spending.  

The Stoxx Europe Aerospace and Defense index, which touched on record highs during Monday’s session, was up more than 1% by 9:09 a.m. London time.

German defense manufacturer Renk Group jumped 8.7%, while shares of Polish defense equipment maker Lubawa added 6.6%. German defense tech firm Hensoldt was up 4.1%.

The moves came after officials including EU Commission President Ursula von der Leyen, NATO chief Mark Rutte and U.K. Prime Minister Keir Starmer spoke publicly in recent days about boosting European defense spending. Meanwhile, European leaders met in Paris on Monday to discuss the war in Ukraine, as U.S. and Russian delegates prepared to meet in Saudi Arabia for peace talks that have so far excluded Ukrainian and other regional officials.

— Chloe Taylor

The U.K.’s unemployment held steady at 4.4% in the three months to December, data from the country’s Office for National Statistics showed on Tuesday.

The figure was flat on the previous quarter, when unemployment in the U.K. hit its highest level since the three months to May 2024. On an annual basis, the jobless rate was up by 0.5 percentage points.  

A hike in employer National Insurance contributions — a tax on workers’ income — announced by Britain’s government in October, was met with backlash as employers warned rising costs would limit their ability to take on new staff. In a November survey by the Confederation of British Industry, almost half of businesses said they planned to trim their workforces to cope with increasing expenses.

Finance Minister Rachel Reeves has defended her fiscal policies, arguing that she is “fighting every single day … to kick start the economy.”

— Chloe Taylor

European leaders gathered in Paris on Monday to discuss the path to peace in Ukraine, ahead of U.S.-Russia talks on ending the war that have so far excluded Ukrainian and other regional representatives.

After the emergency summit in the French capital, British Prime Minister Keir Starmer told reporters the war in Ukraine was an “existential question for Europe as a whole.”

“I’m prepared to consider putting British forces on the ground, alongside others, if there is a lasting peace agreement,” he said on Monday evening. “But there must be a U.S. backstop – because a U.S. security guarantee is the only way to effectively deter Russia from attacking Ukraine again.”

Starmer also addressed Europe’s role in bolstering its own defenses, something the Trump administration has been pressuring regional leaders to commit to in the form of increased defense spending. On Monday, European defense stocks rose to a record high after the weekend’s Munich Security Conference saw officials discuss hiking their defense budgets.

“President Trump has long expressed the wish for Europe to step up and meet the demands of its own security,” Starmer said on Monday. “Today’s informal meeting was a vital first step in responding to that challenge. On defense, it’s clear the U.S. is not going to leave NATO — but we Europeans will have to do more … Europeans will have to step up, both in terms of spending and the capabilities that we provide.”

Starmer told reporters he would travel to Washington next week to meet Trump.

— Chloe Taylor

European markets are expected to open broadly higher Tuesday.

The U.K.’s FTSE 100 index is expected to open 3 points higher at 8,768, Germany’s DAX up 64 points at 22,857, France’s CAC flat, down 1 point at 8,194 and Italy’s FTSE MIB 185 points higher at 38,587, according to data from IG.

Earnings are set to come from Capgemini and the InterContinental Hotels Group. On the data front, French inflation data is due, as is the latest ZEW survey of economic sentiment in Germany and Europe.

— Holly Ellyatt