European shares pulled back from their record highs on Tuesday, as Capgemini led IT stocks lower and rising bond yields put additional pressure on the market, while a rally in defence stocks began to lose momentum.
The pan-European STOXX 600 index gave up its early gains to trade flat at 555.40 points, as of 0920 GMT.
The aerospace and defence index rose 1.3%, with Italy’s Leonardo up 2.3%, while Sweden’s Saab AB rose 2.5% and Britain’s BAE Systems (LON:BAES) gained 0.6%.
German arms manufacturer Rheinmetall (ETR:RHMG) ticked up 2.3%, while Thyssenkrupp (ETR:TKAG), which is planning to spin off its warship division, advanced 3.1% after a nearly 20% surge on Monday.
The sector had surged 4.6% on Monday in its biggest one-day rise since Russia’s invasion of Ukraine in February 2022. The surge came after European Commission President Ursula von der Leyen said the commission would propose exempting defence spending from EU government spending limits.
U.S. and Russian officials met in Riyadh for the highest-level talks to date between the two former Cold War foes on ending the war in Ukraine.
“When you see such a strong momentum, you tend to see a pullback just to stabilise that momentum… you may see some profit-taking,” said Daniela Hathorn, senior market analyst at Capital.com.
Keeping a lid on the market’s gains, Capgemini slid 9% after the French IT consulting giant reported a 2% annual decline in sales, though it surpassed expectations. The technology sector lost 1.1%.
Elevated bond yields also weighed on the broader market as investors expected increased European bond issuance to fund defence spending. The yield on the German 10-year benchmark was near a three-week high. [GVD/EUR]
Higher yields benefited the banking sector, which rose 0.7%, while rate-sensitive real estate stocks fell by 0.5%.
Utilities, often seen as bond proxies, were among the largest drags with a decline of 0.7%. Enagas (BME:ENAG) dropped 2.9% after the Spanish gas grid operator anticipated a fall in core earnings this year.
On the data front, consumer prices in France rose by 1.8% year-on-year in January, aligning with analysts’ expectations and the preliminary reading.
In the UK, pay growth accelerated in late 2024, highlighting why the Bank of England has been cautious about cutting interest rates despite a generally weak economy.
German investor morale improved more than expected in February.
Among other stocks, IHG, the owner of Holiday Inn, lost 3.1% following the announcement of its 2024 results.
Antofagasta (LON:ANTO) gained 2.7% after the miner’s annual core profit rose 11%.
Glencore (OTC:GLNCY) ticked up 1.3% after Morgan Stanley (NYSE:MS) upgraded its rating to “overweight” from “equal weight”.
