A look at the day ahead in U.S. and global markets from Mike

Dolan

Europe's defence stocks, up almost 20% for the year so

far, surged another 1% on Tuesday as U.S. officials met Russian

counterparts in Saudi Arabia for talks about ending the war in

Ukraine and Germany prepared to go to the polls this weekend.

U.S. markets were closed on Monday for the President's Day

holiday and are set to return in relatively buoyant mood, with

stock futures firmer near record highs even with Treasury

yields and the dollar ticking back higher again.

But attention has turned to Europe in what may prove to be a

landmark week for the continent politically and economically,

and as Europe's broad stock indexes are drawing value

investors back across the Atlantic again this year, given their

near 40% valuation discount to S&P500 cousins.

Euro zone stock gains of more than 12% in dollar

terms this year are almost four times that of the American

benchmark, with the record high German DAX up 14%.

While rebalancing due to valuation extremes is a key driving

force, the prospect of higher defence spending in Europe has

added a major tailwind - with the outcome of Germany's elections

also likely to decide whether a new government in Berlin will

have the two-thirds parliamentary support needed to loosen the

so-called 'debt brake' embedded in its constitution.

Hopes for some broader rethink of public investment spending

as way to rebooting the sluggish German economy have encouraged

portfolio investors to revise their aversion to the region even

in the face of potential U.S. trade wars.

And in the backdrop, German investor morale posted its

strongest increase in two years this month, according to the ZEW

economic research institute.

DEFENCE TAKES CENTRESTAGE

But defence is front and centre of the latest stock price

moves, with even some renewed speculation about the EU returning

to joint sovereign borrowing as a possible route to increased

spending in the area.

Reflecting in part Washington's decision to engage Russia in

talks this week without either Ukrainian or European Union

governments at the table, Europe's defence sector has surged

again.

German arms maker Rheinmetall added another 2% to

its 14% jump on Monday, while Thyssenkrupp, looking to

spin off its warship division, advanced 3% after soaring nearly

20% on Monday.

Italy's Leonardo was up another 2%, while Sweden's

Saab rose 2.5% and Britain's BAE Systems

also gained 1%.

Leaders from major EU states and Britain met in Paris on

Monday, saying they were ready to give Ukraine security

guarantees but adding it was dangerous to conclude a ceasefire

there without a peace agreement at the same time.

EU Commission President Ursula von der Leyen said the EU

would work with Washington on the talks while outlining plans

"to scale up defence production and spending."

With the attention on defence spending and Germany's

election, the 10-year German bund yields pushed back

up to their highest in more than two weeks - even though further

European Central Bank easing remains markets' best guess.

The euro backed off recent highs on Tuesday, with the

dollar index recovering some ground.

Sterling held firm after news that British pay growth

accelerated in late 2024 and the jobs market held up,

underscoring why the Bank of England has been cautious about

cutting interest rates despite a weak overall economy.

Australia's central bank cut its rates for the first time in

more than four years but warned it was too early to declare

victory over inflation and was cautious about the prospects of

further easing. The Aussie dollar firmed on the hawkish

outlook.

Chinese tech stocks continued to rally on Tuesday on

optimism that President Xi Jinping's rare meeting with the

country's tech entrepreneurs foreshadowed a regulatory U-turn

after years of a sector-wide crackdown.

The Hang Seng Tech Index climbed 2.5% to close at

a fresh three-year high and bring the gains for the past month

to over 30%. The broader Hang Seng was up 1.6%, even

though mainland Chinese shares fell back about 1%.

Back on Wall Street, housing and manufacturing indicators

top the economic diary while the earnings season starts to wind

down. With almost 80% of S&P500 corporate earnings now out,

annual profit growth is tracking a punchy 15.3% through the

final quarter of last year.

Key developments that should provide more direction to U.S.

markets later on Tuesday:

* US February NAHB housing index, New York Federal Reserve's Feb

manufacturing survey, US December TIC data on overseas holdings

of Treasuries; Canada January consumer price inflation

* San Francisco Federal Reserve President Mary Daly and Fed Vice

Chair for Supervision Michael Barr speak; Bank of England

governor Andrew Bailey speaks

* US corporate earnings: Allegion, Arista, Celanese, CoStar,

Devon, Entergy, EQT, International Flavors & Fragrances,

Medtronic, Occidental, Vulcan etc

* U.S. Treasury sells inflation protected 30-year bonds

* World Trade Organization's main decision body meets in Geneva

(Editing by Bernadette Baum)