European Stocks Pause Near Highs: DAX Hits Record, UK Bond Yields Sink to 8-Week Low

Frankfurt/London/Brussels – European equities closed Wednesday mixed, reflecting a 'pause' after a robust rally that saw several indices reach record highs. Investors continued to assess the outlook for monetary policy in Europe and the UK, while renewed geopolitical tensions boosted defense stocks. Regionally, the STOXX 50 and STOXX 600 both slipped about 0.1% after hitting all-time highs in the prior session. Eurozone inflation data showed annual inflation slowing to 2% in December as expected, while core inflation fell unexpectedly, reinforcing the view that the European Central Bank could cut borrowing costs later this year. Financial stocks weighed on the region, with ING and BBVA down over 2% each, and Deutsche Boerse falling more than 3%. In contrast, defense stocks rallied sharply on rising geopolitical risks linked to Greenland and the US seizure of a Russian tanker, with Rheinmetall and Leonardo up roughly 5% and Thales jumping 8%. In Germany, the DAX outperformed, rising 0.9% to a record close of 25,122 points, buoyed by optimism for economic recovery in 2026 driven by government spending and continued demand for defense amid unresolved conflicts. Top gainers included Hensoldt (5.9%), Rheinmetall (4.4%), Renk (3.5%), Zalando (4.9%), Siemens (3.5%), MTU Aero Engines (3.1%), Heidelberg Materials (2.9%), and SAP (2.8%). In the UK, 10-year gilt yields fell to 4.418%, the lowest since November 12, as markets priced in one or two quarter-point Bank of England rate cuts before year-end. The BoE last cut rates in December by 25 basis points to 3.75% (5–4 vote), with Governor Andrew Bailey signaling further cuts would be gradual. Heightened global tensions, notably around Venezuela, boosted demand for safe havens and pressured yields lower. Separately, the UK Debt Management Office announced it would cancel £607.4m in bonds maturing in January 2027 through a donation aimed at reducing public debt.