FRANKFURT: European shares finished higher on Thursday as a rally in defence stocks helped lift the main index, with investors taking in a widely anticipated European Central Bank decision to keep interest rates unchanged.
The pan-European STOXX 600 ended 0.51 percent higher at 555.13 points, with the region’s aerospace and defence index hitting an all-time high, up 2.5 percent.
Defence stocks led index gains as investors weighed ongoing geopolitical tensions in the eastern part of the continent after Poland shot down a suspected Russian drone earlier in the week.
BAE Systems jumped 6.3 percent, Rheinmetall rose 2.3 percent and Rolls-Royce advanced 2.1 percent.
“The more we get these little touch points of continued reminders that there’s ongoing uncertainty, the more investors are simply saying I need to have these defence stocks in my portfolio,” said Daniel Coatsworth, chief investment officer at Moneyfarm.
Meanwhile, the ECB left interest rates unchanged on Thursday as expected but offered no clues about its next move, reiterating that the following decision will be data-dependent.
The central bank also lowered inflation forecasts to 1.9 percent in 2027, below the 2.0 percent projected in June, while core inflation is seen at 1.8 percent then, both below the 2 percent target.
Traders curbed their bets on another rate cut, seeing just under a 50 percent chance of a cut by June 2026, according to ICAP data. Declining bets supported the euro, which was last up about 0.3 percent against the dollar. “The ECB appears confident that the economic bloc can withstand the impact of President Trump’s tariffs for some more time, when it decided to hold the deposit rate unchanged at 2 percent,” said Richard Flax, chief investment officer at Moneyfarm. Germany’s two-year bond yield, vulnerable to interest rate expectations, was up 4 bps to 1.99 percent.
The construction and materials sector jumped 1.4 percent after JP Morgan turned positive on key European building-materials names, upgrading Italy’s Buzzi to “overweight” and keeping Germany’s Heidelberg as its top pick. Buzzi rose 6.7 percent and Heidelberg added 2.5 percent.
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