Category: Market Summary

U.S. equity futures traded higher on Thursday, pointing to a recovery on Wall Street after stocks retreated sharply in the previous session following the Federal Reserve’s latest policy announcement.

Investor sentiment improved after the United States and Iran signed a preliminary agreement aimed at ending months of conflict, easing concerns over energy supplies and the potential impact on global economic growth.

Peace Framework Signals Progress in Middle East

President Donald Trump and Iranian President Masoud Pezeshkian formally approved a memorandum of understanding that lays the groundwork for negotiations on a permanent peace settlement.

The agreement takes effect immediately and includes provisions for the reopening of the Strait of Hormuz and the lifting of U.S. naval restrictions on Iranian ports.

Under the 14-point framework, officials from both countries are expected to begin detailed negotiations over the next 60 days.

Crude Prices Continue to Retreat

Oil markets reacted positively to the prospect of improved supply flows, with crude prices extending recent losses.

Futures moved closer to levels seen before the outbreak of hostilities in late February, helping ease fears of energy-driven inflation.

“That has huge significance for inflation and interest rates, as well as business, consumer and investor sentiment,” said Russ Mould, investment director at AJ Bell. “It takes the pressure off industries and households and is hugely positive for global economic growth.”

Intel Jumps After Trump Comments

Among notable movers, Intel (NASDAQ:INTC) surged 8.5% in premarket trading.

The gain followed comments from Trump indicating that Apple (NASDAQ:AAPL) had agreed to work with Intel on chip design and manufacturing projects in the United States.

The development fueled optimism across the semiconductor sector and helped support broader market sentiment.

Federal Reserve Sparks Market Volatility

Markets struggled on Wednesday after the Federal Reserve kept interest rates unchanged but adopted a more cautious stance on inflation.

The Dow Jones Industrial Average fell 507.12 points, or 1%, to 51,492.55. The S&P 500 declined 91.25 points, or 1.2%, to 7,420.10, while the Nasdaq dropped 354.69 points, or 1.3%, to 26,021.66.

Policymakers Leave Door Open to Further Tightening

The Fed maintained its benchmark rate at 3.5% to 3.75%, a move widely anticipated by markets.

However, updated forecasts suggested policymakers now see a greater possibility that rates could move higher before the end of the year.

The median projection points to rates reaching 3.8% by the end of 2026, a notable shift from earlier expectations for lower borrowing costs.

Strong Retail Data Highlights Consumer Resilience

Economic data released before the Fed decision painted a relatively positive picture of consumer spending.

The Commerce Department reported that retail sales rose 0.9% in May, following an upwardly revised 0.4% increase in April.

The reading comfortably exceeded forecasts for a 0.5% gain.

Software and Transport Sectors Lead Declines

Technology shares were among the weakest performers during Wednesday’s session.

The Dow Jones U.S. Software Index fell 3.2%, while transportation stocks also came under heavy selling pressure, pushing the Dow Jones Transportation Average down 3%.

Retailers, oil service companies, gold producers and commercial real estate stocks also lost ground, although semiconductor and brokerage shares showed relative strength.

European equities traded with little overall direction on Thursday as investors assessed the latest policy signals from major central banks, including the U.S. Federal Reserve, which left interest rates unchanged but indicated that further tightening remains possible later this year.

The Fed’s updated economic projections suggested policymakers still see scope for at least one additional rate increase, prompting investors to reassess the outlook for global monetary policy.

Central Banks Hold Rates Steady

In Europe, the Swiss National Bank kept its benchmark rate at 0%, despite recent inflationary pressures, while the Bank of England also left borrowing costs unchanged at 3.75%.

Economic data from the UK provided some support for sentiment after figures showed the unemployment rate eased to 4.9% in the three months to April, down from 5.0% in the previous period. Payroll employment also returned to growth following three consecutive monthly declines.

Major Indexes Trade Mixed

Market performance across the region was uneven.

The UK’s FTSE 100 declined 0.9%, pressured by weakness in energy and consumer stocks. France’s CAC 40 traded around flat levels, while Germany’s DAX outperformed with a gain of 0.2%.

L’Oréal Falls After Indian Acquisition Deal

Among individual stocks, L’Oreal (EU:OR) moved lower after announcing an agreement to acquire a controlling stake in Indian personal care company Innovist.

Investors appeared cautious about the transaction as the cosmetics group continues to expand its presence in fast-growing international markets.

Tesco Slides on Slower Sales Growth

Tesco (LSE:TSCO) was among the weakest performers in London after the retailer reported a slowdown in first-quarter sales growth.

The update raised concerns about consumer spending trends despite the company’s continued focus on value and customer retention initiatives.

Lower Oil Prices Weigh on Energy Stocks

Energy shares came under pressure as easing geopolitical tensions pushed oil prices lower.

Brent crude moved toward the $78-a-barrel level, dragging down major producers including BP Plc (LSE:BP.) and Shell (LSE:SHEL).

The decline in crude prices reflected improving sentiment around global energy supplies and reduced concerns over potential disruptions.

FirstGroup Jumps on Results and Buyback

FirstGroup (LSE:FGP) advanced strongly after the transport operator reported resilient annual results and unveiled a new £100 million share repurchase programme.

Investors welcomed the combination of solid operational performance and additional capital returns to shareholders.

Informa Gains After Revenue Update

Informa (LSE:INF) also posted notable gains after reporting underlying revenue growth of 6.4% in a trading update covering the first five months of the year.

The exhibitions and academic publishing group reaffirmed its full-year outlook, helping to reinforce confidence in its growth trajectory despite broader market uncertainty.

European equities opened cautiously on Thursday as investors weighed the impact of the Federal Reserve’s latest policy signals against easing geopolitical tensions following the recent U.S.-Iran agreement.

The pan-European STOXX 600 slipped 0.2% in early trading. France’s CAC 40, Italy’s FTSE MIB and Spain’s IBEX 35 traded little changed, while Germany’s DAX outperformed with a gain of 0.3%.

Fed Message Overshadows Geopolitical Relief

Markets had initially been positioned for a broader relief rally after the United States and Iran reached a landmark agreement that helped ease concerns over global energy supplies and trade routes.

The prospect of improved stability in the Middle East pushed oil prices lower and initially supported investor sentiment.

However, enthusiasm faded after the Federal Reserve delivered a firmer-than-expected policy message despite leaving interest rates unchanged.

Investors interpreted the central bank’s comments as a signal that monetary policy could remain restrictive for longer than previously anticipated.

Rate Expectations Shift Higher

Financial markets moved quickly to adjust expectations following the Fed’s latest guidance.

According to CME’s FedWatch tool, the probability of an interest rate increase by December rose sharply to 85%, compared with roughly 42% before the central bank’s meeting.

The reassessment of future U.S. monetary policy helped dampen risk appetite globally and contributed to a more cautious tone across European equity markets.

Energy Stocks Weigh on Major Indexes

The decline in oil prices added further pressure to European markets, particularly within the energy sector.

Shares of BP Plc (LSE:BP.) and TotalEnergies SE (EU:TTE) came under pressure as Brent crude retreated toward key technical support levels.

The weakness in large energy companies weighed on both the FTSE 100 and CAC 40, limiting broader market performance despite strength in other sectors.

Focus Turns to Central Banks

In the UK, the FTSE 100 fell 0.5% as investors awaited the Bank of England’s latest monetary policy decision.

While policymakers are widely expected to leave interest rates unchanged, market participants are expected to focus closely on comments from Governor Andrew Bailey for indications on the future direction of UK monetary policy.

Attention will also remain on the European Central Bank later in the day, with several policymakers, including Chief Economist Philip Lane, scheduled to speak.

Investors will be watching for any clues regarding the future path of interest rates across the eurozone.

Mixed Performance Among Individual Stocks

Among notable movers, Tesco (LSE:TSCO) declined 2.5% after the retailer reported slower sales growth in its latest trading update.

In contrast, Informa (LSE:INF) gained 2% after reaffirming its outlook and signalling stronger growth prospects for the coming years.

The mixed corporate performances reflected a market that remains highly sensitive to both macroeconomic developments and company-specific news.

UK equities moved lower on Thursday as investors awaited the latest interest rate decision from the Bank of England, while a sharp decline in crude oil prices weighed heavily on energy stocks.

The FTSE 100 was down 0.54% in early trading, lagging broader European markets. By contrast, Germany’s DAX gained 0.46% and France’s CAC 40 rose 0.25% as investors reacted positively to signs of improving stability in the Middle East.

Labour Market Remains Resilient

Fresh economic data painted a mixed picture of the UK labour market ahead of the central bank’s policy announcement.

Average weekly earnings excluding bonuses remained at an annual growth rate of 3.4% in the three months to April, exceeding economists’ expectations of 3.2%. Meanwhile, the unemployment rate unexpectedly fell to 4.9% from 5.0%.

Total earnings including bonuses increased 4.4% year-on-year, suggesting wage pressures remain relatively firm despite broader signs of economic moderation.

However, other indicators pointed to some cooling in employment conditions. Job vacancies fell by 19,000 to 707,000 during the three months to May, marking the lowest level since early 2021, while the claimant count increased during May.

The figures are likely to leave policymakers balancing concerns about persistent wage growth against evidence of softening labour demand.

Middle East Agreement Pressures Oil Prices

Market sentiment was also influenced by developments in the Middle East after the United States and Iran agreed a 14-point framework aimed at restoring Iranian oil exports and reopening the Strait of Hormuz.

The agreement outlines a pathway toward a broader deal within 60 days, with implementation discussions expected to begin in Switzerland on Friday.

Investors broadly welcomed the development, viewing it as a potential step toward improving energy security and reducing risks to global trade and shipping routes.

The prospect of additional oil supplies returning to international markets pushed energy prices lower.

Brent crude fell 1.5% to $78.35 a barrel, while U.S. benchmark WTI crude declined 2.0% to $75.28 a barrel. Gold moved in the opposite direction, with spot prices rising 1.1% to $4,305.84 per ounce.

Informa Reaffirms Growth Outlook

Among individual stocks, Informa (LSE:INF) traded higher after reiterating its full-year guidance and expressing confidence in stronger growth prospects for 2027.

The events and academic publishing group reported underlying revenue growth of 6.4% during the first five months of 2026, supported by continued strength in its live events business and a recovery from disruption linked to the Iran conflict.

Management maintained its expectation for double-digit growth in adjusted earnings per share this year.

Tesco Maintains Guidance Despite Softer Sales Growth

Tesco (LSE:TSCO) remained in focus after reporting first-quarter UK like-for-like sales growth of 1.8%.

The figure came in below analyst expectations, with the retailer citing ongoing consumer caution and uncertainty linked to geopolitical developments.

Despite the softer sales performance, Tesco maintained its full-year profit outlook and highlighted continued progress across its value-focused strategy, online operations and customer loyalty initiatives.

Investors Await Bank of England Verdict

Attention now turns to the Bank of England’s policy decision, where investors will be looking for clues on the future path of interest rates and the central bank’s assessment of inflation and economic conditions.

With wage growth remaining relatively firm but labour demand showing signs of moderation, markets are likely to scrutinise any changes in tone regarding the outlook for monetary policy over the remainder of the year.

European equities were largely subdued on Wednesday as investors adopted a cautious stance before the U.S. Federal Reserve’s interest rate announcement later in the day and ahead of the planned signing of a peace agreement between Washington and Tehran in Switzerland on Friday.

Market participants remained focused on monetary policy signals from the Fed, while also monitoring developments surrounding the Middle East accord.

UK Inflation Holds Steady

Economic data released in the UK showed that consumer price inflation remained unchanged at 2.8% year-on-year in May, matching the April reading and coming in below expectations for a 3.0% increase.

Producer price data indicated a slight easing in factory-gate inflation, which slowed to 4.0% from 4.1% in April.

Meanwhile, input costs rose 8.7%, accelerating from 7.9% a month earlier and reaching their highest level since February 2023.

Eurozone Wage Pressures Continue to Ease

Separate data from the European Central Bank pointed to moderating wage growth across the euro area.

Negotiated wage increases are projected to slow to 2.6% by 2026, a trend that may help ease concerns among policymakers about inflationary pressure stemming from rising labour costs.

Major Indices Drift Lower

Trading across the region remained mixed.

France’s CAC 40 hovered slightly above flat territory, while the UK’s FTSE 100 slipped 0.1% and Germany’s DAX declined 0.2%.

The muted performance reflected investor reluctance to take significant positions ahead of key policy and geopolitical events.

Auto Sector Under Pressure After BMW Warning

Automotive stocks led the declines after BMW (TG:BMW) lowered its outlook for 2026.

Shares in the German manufacturer dropped 6.5%, weighing on the broader sector.

Volkswagen (TG:VOW3) fell 2.2%, Mercedes-Benz (TG:MBG) lost 3.3%, and Renault (EU:RNO) retreated 1%.

Thales Gains on Strategic Partnership

Defense technology group Thales (EU:HO) rose around 1% after announcing a strategic collaboration with Renault Group.

The partnership is focused on developing and industrialising large-scale production of the TOUTATIS loitering munition, expanding cooperation between the defense and automotive industries.

Nokia Advances on U.S. Expansion Plans

Nokia (NYSE:NOK) gained 1.3% after revealing plans to significantly expand its advanced testing and packaging operations in Allentown, Pennsylvania.

The investment forms part of the company’s broader strategy to strengthen its manufacturing and technology capabilities in the United States.

Investors entered Wednesday focused on a pivotal Federal Reserve decision, while developments surrounding the proposed U.S.-Iran peace agreement continued to reshape expectations for energy markets, inflation and global monetary policy.

At the same time, oil prices remained under pressure and SpaceX (NASDAQ:SPCX) continued to attract investor attention following its record-setting public market debut.

Fed Meeting Takes Centre Stage

The Federal Reserve is expected to keep its benchmark interest rate unchanged between 3.5% and 3.75%, marking the first policy announcement under Chair Kevin Warsh.

Although no immediate change in rates is anticipated, investors will closely examine the Fed’s statement and economic forecasts for indications of how policymakers view inflation, growth and the future direction of interest rates.

Warsh faces the challenge of balancing political pressure for lower rates against concerns that earlier energy-market disruptions could still influence inflation trends.

New Details Emerge on U.S.-Iran Framework

Reports suggest that negotiators are moving closer to a formal agreement between Washington and Tehran.

The framework reportedly includes a permanent ceasefire, the reopening of the Strait of Hormuz, relief from certain sanctions and the launch of fresh discussions regarding Iran’s nuclear programme.

Several reports also indicate that Iranian oil exports could resume quickly if the agreement is formally signed, potentially increasing global energy supplies and helping stabilise markets.

However, observers note that negotiations remain ongoing and key elements of the agreement have yet to be finalised.

Oil Market Reacts to Supply Expectations

Crude prices continued their recent retreat as traders priced in the possibility of additional Iranian supply returning to global markets.

Brent crude futures fell to US$78.35 per barrel, extending losses seen over recent sessions. The decline reflects expectations that shipping routes through the Strait of Hormuz will reopen and that sanctions relief could boost export volumes.

Even so, energy prices remain above levels seen before hostilities began earlier this year.

Investors Monitor Inflation Outlook

The fall in oil prices has eased concerns about a prolonged inflation shock and has encouraged markets to reassess expectations for central bank policy.

Analysts believe lower energy costs could support disinflation trends and reduce pressure on policymakers, although uncertainty remains over the pace of future interest-rate changes.

Updated economic projections from the Federal Reserve are therefore expected to play a crucial role in shaping market expectations.

SpaceX Continues to Rewrite Records

SpaceX (NASDAQ:SPCX) maintained its extraordinary post-IPO momentum, adding another 4.83% on Tuesday to close at US$201.80 per share.

The gain lifted the company’s market value to approximately US$2.65 trillion, placing it among the most valuable publicly traded companies in the world.

Since its US$135-per-share flotation on June 12, the stock has surged roughly 50%, highlighting intense investor demand and reinforcing its status as one of the most closely watched listings in market history.

Additional gains in after-hours trading suggested enthusiasm for the shares remains strong.

European equities traded cautiously on Wednesday after a strong four-session advance, with investors taking a breather as they assessed the implications of the U.S.-Iran peace agreement and prepared for key monetary policy signals from both Europe and the United States.

The pan-European STOXX 600 remained broadly unchanged, hovering just below record levels after gaining nearly 3% over the previous four trading sessions.

Major European Indices Consolidate Gains

Germany’s DAX slipped 0.4%, while France’s CAC 40, Italy’s FTSE MIB and Spain’s IBEX 35 traded largely flat.

Swedish stocks slightly underperformed the broader region, easing 0.1% as investors positioned for an expected decision by the Riksbank to leave interest rates unchanged.

Across Europe, trading activity reflected a more cautious tone after the recent rally, with investors reluctant to take significant positions ahead of several major macroeconomic events.

Markets Focus on Inflation and Central Banks

Attention has shifted toward the release of eurozone inflation data and the latest policy announcement from the U.S. Federal Reserve.

Economists expect annual eurozone inflation to rise to 3.2% in May, making the data a key indicator for expectations surrounding future European Central Bank policy decisions.

At the same time, investors are closely monitoring the Federal Reserve’s meeting, the first chaired by Kevin Warsh since taking office.

While no change in U.S. interest rates is widely expected, markets are expected to scrutinise the central bank’s economic outlook and forward guidance for clues on the future direction of global monetary policy.

Real Estate Stocks Hold Steady

Interest-rate-sensitive property companies showed little movement as investors waited for further clarity on the interest-rate outlook.

Shares in Segro (LSE:SGRO) and Aroundtown (BIT:1AT1) traded broadly unchanged, reflecting the market’s cautious approach ahead of the inflation data and central bank decisions.

Many investors chose to lock in recent gains rather than increase exposure before the key announcements.

Falling Energy Prices Support Disinflation Narrative

Energy markets continued to influence investor sentiment after reports that the United States intends to formally waive sanctions on Iranian crude exports.

The prospect of increased oil supply has accelerated the recent decline in energy prices and reduced concerns over a prolonged inflationary shock. As a result, investors have increasingly removed the geopolitical risk premium that had been embedded in commodity markets during recent tensions.

The impact was also visible in bond markets, where short-dated eurozone government bond yields continued to fall as expectations for aggressive monetary tightening eased.

FTSE 100 Lags Regional Peers

The UK’s FTSE 100 underperformed broader European markets as weakness in energy stocks offset the positive impact of lower inflation expectations.

Heavyweight constituents BP (LSE:BP.) and Shell (LSE:SHEL) remained under pressure from falling oil prices, limiting gains for the London benchmark, which traded broadly flat.

Investors also digested the latest UK inflation figures, which showed annual consumer price growth holding steady at 2.8%. The data will feed into the Bank of England’s interest-rate decision scheduled for Thursday.

Individual Movers

Among notable stock movements, Medincell (EU:MEDCL) declined 10% after publishing its full-year results.

Meanwhile, Hays (LSE:HAS) gained 7% after announcing the sale of six business units as part of its ongoing portfolio reshaping strategy.

UK equities traded slightly lower on Wednesday after inflation data showed headline consumer prices remained unchanged in May, while stronger-than-expected services inflation reinforced expectations that the Bank of England will remain cautious when it announces its latest interest rate decision on Thursday.

The FTSE 100 fell 0.13%, while Germany’s DAX declined 0.39% and France’s CAC 40 eased 0.03%. Sterling was also marginally weaker against the U.S. dollar, slipping 0.10% to $1.3418.

Headline Inflation Holds at 2.8%

According to the Office for National Statistics, UK consumer price inflation remained at 2.8% in the year to May, matching April’s reading and coming in below expectations for an increase to 3%.

On a monthly basis, prices rose 0.2%, unchanged from the previous month.

Transport costs provided the largest upward contribution to inflation, helped by a 10.3% increase in air fares between April and May. Meanwhile, food and non-alcoholic beverages acted as the largest drag on the index, with annual food inflation slowing to 2.2%, its lowest level since December 2024.

Services Inflation Remains a Concern

While headline inflation was stable, the services component accelerated to 3.7% from 3.2%, suggesting underlying price pressures remain more persistent.

Analysts noted that the stronger services reading may limit expectations for near-term monetary easing and could help support sterling despite broader market uncertainty. Expectations for further Bank of England rate increases have already moderated in recent weeks, but policymakers are likely to remain cautious given the resilience of domestic inflation pressures.

Oil Extends Decline as Markets Price in Middle East Developments

Energy markets remained under pressure, with Brent crude falling below $79 a barrel for the first time in three months and U.S. benchmark WTI crude declining by more than 1%.

The move extended losses from the previous session as traders continued to factor in the partial reopening of the Strait of Hormuz ahead of the expected formal signing of a U.S.-Iran agreement later this week.

Although oil prices remain above pre-conflict levels of around $65 per barrel, the recent retreat has eased some concerns over energy-driven inflation and is increasingly being viewed as a supportive factor for central banks in both the UK and Europe.

Gold was little changed, with spot prices easing 0.05% to $4,329.16 per ounce.

Geopolitical Tensions Remain in Focus

Attention also remained on developments in the Middle East following comments from U.S. President Donald Trump at the G7 summit in France.

Trump criticised Israel’s military campaign in Lebanon, saying the country had been fighting Hezbollah “too long” and that “too many people are being killed.” He also said Prime Minister Benjamin Netanyahu needed to be “more responsible with respect to Lebanon.”

The United Nations peacekeeping mission in Lebanon reported a reduction in cross-border violence, although Lebanese state media said Israeli strikes killed at least four people on Tuesday.

Meanwhile, Iran warned of a “harsh response” if Israeli military operations continue, while Iranian Foreign Minister Abbas Araghchi described the Lebanon conflict as “linked and interdependent” with the broader regional agreement currently under discussion.

Trump said the text of the agreement would be released within days and submitted to Congress for review, while Vice President JD Vance said the delay reflected diplomatic sensitivities surrounding the process.

UK Corporate Highlights

Hays Continues Portfolio Reshaping

Hays (LSE:HAS) completed the disposal of its operations in the Czech Republic, Denmark, Hungary, Luxembourg, Romania and Sweden to Meraki Capital, generating approximately £4 million in net cash proceeds. The recruitment group is also reviewing strategic options for a further seven markets as part of its ongoing restructuring programme.

AO World Delivers Record Profit

AO World (LSE:AO.) reported a 16% increase in annual adjusted pre-tax profit and announced plans to return a further £20 million to shareholders through a special dividend and share buyback programme. The retailer also highlighted progress in expanding its customer ecosystem through the launch of AO Mobile.

PZ Cussons Upgrades Guidance Again

PZ Cussons (LSE:PZC) raised its profit expectations for the fourth time, saying adjusted operating profit for FY2026 is now expected to be at or slightly above the upper end of its £53 million to £57 million guidance range. The company cited strong sales momentum and stability in the Nigerian naira as key contributors to the improved outlook.

Equities Gain Ground as Inflation Concerns Ease

European stock markets traded higher on Tuesday, supported by a continued decline in oil prices that helped ease concerns over inflation and the potential path of global interest rates.

Brent crude remained close to $82 per barrel after reports suggested that U.S. President Trump could unveil details of a preliminary agreement aimed at ending the conflict with Iran ahead of Friday.

While the exact provisions of the agreement have yet to be disclosed, Trump indicated that the Strait of Hormuz could reopen as early as Friday, raising expectations of improved energy flows and lower supply risks.

Central Bank Meetings Remain in Focus

Investors also kept a close eye on upcoming policy announcements from the U.S. Federal Reserve and the Bank of England, both of which are expected to provide fresh guidance on monetary policy.

The prospect of lower energy costs has helped reduce pressure on central banks, although markets remain alert to any signals regarding future interest-rate decisions.

Major European Indices Move Higher

Among the region’s leading benchmarks, France’s CAC 40 advanced 0.8%, while the UK’s FTSE 100 gained 0.6%.

Germany’s DAX also moved higher, rising 0.5% as investors welcomed improving risk sentiment across global markets.

UniCredit and Commerzbank Extend Gains

Banking stocks attracted attention after Germany formally rejected UniCredit’s (BIT:UCG) attempt to acquire a stake in Commerzbank (TG:CBK).

Despite the setback to the proposed transaction, shares of both lenders moved higher during trading as investors assessed the implications of the government’s decision.

Saab Jumps on French Defence Contract

Swedish defence and aerospace group Saab (BIT:1SAAB) posted strong gains after securing a contract from France’s defence procurement agency for its anti-tank weapons systems.

The agreement adds to Saab’s growing order book amid increasing defence spending across Europe.

Hilton Food and STMicroelectronics Under Pressure

In London, Hilton Food (LSE:HFG) declined after confirming that Mark Allen will assume the role of group chief executive from July 1.

Meanwhile, STMicroelectronics (BIT:STMMI) (EU:STMPA) fell after announcing plans to issue $1.5 billion of convertible bonds and redeem $750 million of outstanding convertible notes due in 2027 ahead of maturity.

Shares of BAE Systems (LSE:BA.), Rolls-Royce (LSE:RR.) and Babcock International (LSE:BAB) moved higher on Tuesday, climbing between 2% and 2.5% as investors positioned for increased UK defence expenditure and stronger long-term demand across the sector.

The gains reflected growing expectations that government spending on military capabilities will continue to rise amid an increasingly uncertain geopolitical environment.

Defence Budget Review in Focus

Market attention has turned to Defence Secretary Dan Jarvis, who is expected to reassess the government’s defence investment strategy and may seek additional resources from the Treasury.

Jarvis took over the role following the resignation of John Healey last week. Healey stepped down after rejecting a proposed funding package, arguing that it would leave the UK’s armed forces without sufficient resources to meet future requirements.

The former defence secretary opposed a £13.5 billion funding proposal designed to address an estimated £18 billion gap in financing for major military programmes.

Government Signals Further Spending Increases

Investor sentiment was further supported by comments from Chancellor Rachel Reeves, who said there would be “a further big uplift in defence spending” as part of the government’s long-term investment plans.

Prime Minister Keir Starmer has also committed to increasing defence spending to 3% of gross domestic product during the next parliamentary term, with the objective of reaching that level by the end of 2034.

The pledge is expected to underpin future contract opportunities for leading defence contractors, many of which already have extensive multi-year order books.

Geopolitical Risks Support Sector Outlook

Defence stocks also benefited from heightened geopolitical tensions ahead of the G7 leaders’ summit in France, where security concerns involving Russia and Iran are expected to feature prominently on the agenda.

The conflict involving Iran has now entered its fourth month, while tensions with Russia remain elevated following the seizure of a Russia-linked oil tanker by Britain’s Royal Marines in the English Channel over the weekend.

Starmer is expected to use the summit to advocate for tougher sanctions against Russia and additional military and energy assistance for Ukraine.

Defence Remains a Strong Performer Across Europe

The defence industry has been one of the standout sectors in UK equity markets in recent years, supported by a broad revaluation as Western governments increase military budgets in response to evolving security challenges linked to Russia, China and other geopolitical threats.

The trend extends across Europe, where defence spending continues to rise sharply. Industry estimates suggest that total European Union defence expenditure will exceed €392 billion this year, compared with €221 billion in 2021.

The sustained increase in military investment is expected to provide a favourable backdrop for defence companies across the continent, supporting long-term growth prospects for equipment manufacturers, engineering groups and military service providers.