Europe stocks end at record high with defence spending spike in focus

(Fixes move of defence index in first bullet)

By Pranav Kashyap and Johann M Cherian

(Reuters) -European shares closed at a record high on Tuesday, with banking and defence stocks among top gainers as investors priced in the likelihood of increased domestic military spending against a backdrop of peace talks to end the Russia-Ukraine conflict. 

The pan-European STOXX 600 index rose 0.3%, with Germany's main stock index up 0.2%, also an all-time high. 

German midcap stocks also edged up 0.5% to finish at levels not seen since August 2023 ahead of upcoming elections. 

The United States and Russia said they had agreed to press ahead with efforts to end the war in Ukraine after holding talks in the Saudi capital for the first time at which Kyiv was not represented. 

Against this backdrop, European leaders have voiced the need to increase defence spending in response to the U.S. being less willing to take the lead on Europe's defence, which will likely result in greater government borrowing.

Yields on euro zone bonds ticked higher, aiding a 1.9% rise in banks that led sectoral gains. On the other hand, utilities, often seen as bond proxies, declined 0.5%.

Defence stocks gained 0.8%, with Leonardo up 2.1%, Sweden's Saab AB rising 0.6% and France's Thales adding 2.3%.

Germany's Thyssenkrupp, which is planning to spin off its warship division, advanced 7% after a nearly 20% surge on Monday.

The defence sector has gained for the eighth straight session. In the previous session, it surged 4.6%, which was its biggest one-day rise since Russia's invasion of Ukraine in February 2022. 

"The U.S. pushing ahead and engaging with Russia over a deal in Ukraine has instilled a sense of urgency among European leaders," analysts at ING Economics said in a note.

"The prospect of joint borrowing to fund the EU’s defence needs had also received more tailwinds."

Among others, Capgemini slid 10.2% after the French IT consulting giant reported a 2% annual decline in sales, though it surpassed expectations. The technology sector lost 1.1%.

Enagas dropped 0.7% 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.

German investor morale improved more than expected in February. 

IHG, the owner of Holiday Inn, lost 4.7% following the announcement of its 2024 results.

HSBC <HSBA.L> gained 1.9% after the lender said it has laid off around 40 investment bankers in Hong Kong, as part of a global restructuring exercise at the Asia-focused lender to cut costs.

(Reporting by Pranav Kashyap and Johann M Cherian in Bengaluru; Editing by Savio D'Souza and Subhranshu Sahu)