(Sharecast News) - European shares closed at a fresh record high on Wednesday, led by defence stocks and buoyed by a sharper-than-expected cooling in UK inflation that strengthened expectations for a near-term interest rate cut.
The pan-European Stoxx 600 rose 1.23% to 628.95, while Germany's DAX gained 1.16% to 25,287.32, France's CAC 40 advanced 0.81% to 8,429.03 and the FTSE 100 climbed 1.23% to 10,686.18.
"Weaker UK inflation and strong results from star performers in the defence and mining sector have propelled the FTSE 100 to yet more new highs," said Chris Beauchamp, Chief Market Analyst at IG.
"It is a firm risk-on day for global markets anyway, which seem to be unfazed by the continued military buildup in the Middle East.
"Yesterday's sharp reversal in the VIX has heralded a revival of bullish momentum across the board, but it looks like the inevitable dip buying in tech stocks has finally begun."
Patrick Munnelly, market strategy partner at TickMill, added that the FTSE 100 reached a new high on Wednesday, buoyed by a slowdown in domestic inflation, heightening anticipation of a potential interest rate cut as early as March.
"Defence stocks also rallied, driven by impressive results from BAE Systems," he said.
UK consumer inflation slows in January
In economic news, data from the Office for National Statistics showed UK consumer price inflation slowed to 3% in January from 3.4% in December, marking the lowest annual rate since March 2025 and in line with expectations.
Food and non-alcoholic beverage price growth eased to 3.6% from 4.5%, while services inflation dipped to 4.4% from 4.5%.
Core inflation, which strips out energy, food, alcohol and tobacco, edged down to 3.1% from 3.2%, the lowest since September 2021.
"The cost of raw materials for businesses fell over the past year, driven by lower crude oil prices, while the increase in the cost of goods leaving factories slowed," said ONS chief economist Grant Fitzner.
"Airfares were another downward driver this month with prices dropping back following the increase in December.
"Lower food prices also helped push the rate down, particularly for bread and cereals and meat.
"These were partially offset by the cost of hotel stays and takeaways."
The softer inflation print, coupled with recent labour market weakness, increased expectations of a policy easing.
"January's slowdown in inflation, alongside cooling labour market conditions, increases the likelihood that the Monetary Policy Committee will cut rates again over the next couple of months," commented Martin Sartorius, lead economist at the Confederation of British Industry.
"Beyond then, the scope for further Bank Rate reductions will become more limited, as the Committee looks to ensure that inflation returns sustainably to the 2% target."
Separate ONS figures showed UK house price growth eased to 2.4% year-on-year in December from 2.8% in November, with the average price at 270,000.
Prices rose 1.7% in England to 292,000, 5.0% in Wales to 215,000 and 4.9% in Scotland to 191,000, while London remained the only English region to record an annual decline, down 1.0%.
Average UK private rents rose 3.5% year-on-year to 1,367 in January, slowing from 4.0% previously.
In the US, durable goods orders fell 1.4% month-on-month in December following an upwardly revised 5.4% surge in November, though the decline was smaller than the 2% drop expected.
The fall was driven by a 5.3% slide in transportation equipment, including a 25.9% slump in non-defence aircraft and parts.
Excluding transportation, orders rose 0.9%, beating forecasts for a 0.3% gain, while non-defence capital goods orders excluding aircraft increased 0.6% after a revised 0.7% rise.
US mortgage applications rose 2.8% in the week to 14 February, with refinancing applications up 7% and purchase applications down 3%, as rates edged lower.
Building permits increased 4.3% to an annualised 1.44m in December and housing starts rose 6.2% to 1.40m, the strongest pace since July, although full-year 2025 starts were down 0.6% at 1.36m units.
Reports that Christine Lagarde could leave the European Central Bank before her term ends in October 2027 also drew attention.
The Financial Times said she was considering stepping down ahead of the French presidential election next April, though the ECB stated: "President Lagarde is totally focused on her mission and has not taken any decision regarding the end of her term."
BAE lifts defence stocks to lead gains
In equities, defence stocks led gains after BAE Systems reported a better-than-expected rise in annual profits, benefiting from increased military spending.
BAE rose 4.09%, lifting peers Thales, up 4.74%, QinetiQ Group, up 3.31%, Dassault Aviation, up 2.82%, and Renk, up 3.8%.
"Defence stocks saw significant gains, climbing 2.5%," Munnelly said.
"BAE Systems led the charge with a 3.4% jump after reporting full-year operating profits that exceeded expectations.
"The company also revealed a record-breaking order backlog of 83.6bn, driven by strong global demand."
Elsewhere, Mediobanca jumped 5.7% after Monte dei Paschi di Siena said it would take full control of the lender, while Sunrise Communications gained 4.2% in Zurich despite a fourth-quarter core profit miss.
On the downside, Bayer fell 7.38% after its Monsanto unit proposed paying $7.25bn to settle lawsuits alleging its Roundup weedkiller caused cancer.
IMCD dropped 4.7% after annual revenue missed estimates, with Azelis also weaker after a broker downgrade, and Carrefour declined 4.84% after reporting lower operating profit.
Reporting by Josh White for Sharecast.com.
130.01 (1.23%)
0.00