By Nikhil Sharma and Purvi Agarwal
(Reuters) - German equities closed higher on Tuesday, after the parliament approved plans for a massive spending surge, while investors awaited details from a call between U.S. and Russian leaders with a potential Ukraine peace deal on the line.
The blue-chip index closed up 1% after hitting an intraday record high. The domestically-exposed small-cap index climbed 3% to a more than three-year high, while mid-caps were up 1.6%.
Germany’s Bundestag approved the reforms that include a major rollback of the so-called debt brake to increase defence spending, and a 500 billion euro ($546 billion) fund for infrastructure. They will be presented to the upper house on Friday.
The optimism around the reforms has resulted in a rally in defence stocks, the euro and euro zone yields in recent weeks, although they all pared gains after the vote.
"It’s probably been a case of buy the rumour and sell the facts, where the German market has done so much better than everything else. There’s a little bit of profit taking," said Lindsay (NYSE:LNN) James, investment strategist at Quilter.
"You would look for exposures to the German economy, and typically that would take you to the mid and small-cap end of the market cap spectrum."
However, Fitch Ratings said that Germany’s top AAA credit rating could face pressure in the longer run if a vast spending effort is not offset by consolidation measures, or doesn’t lead to a lasting improvement in growth.
The pan-European STOXX 600 gained 0.6%, with European banks leading gains, up 2.5%. The banks index touched its highest level since February 2011, on higher spending prospects.
Energy and automobile and parts shares followed, with most sectors ending the day in the green, as the European benchmark index outperformed Wall Street.
The region-wide aerospace and defence index closed at a record high, advancing 1.4%.
A fund manager survey from BofA Global Research showed the sharpest rotation out of the U.S. into European equities since 1999 and a renewed interest in European small-caps.
Investors also awaited details from a phone call between U.S. President Donald Trump and Russian President Vladimir Putin as the U.S. attempts to convince Moscow to accept a ceasefire in its war with Ukraine.
Computacenter (LON:CCC) jumped 11% after the technology and services provider said it was well placed for progress in 2025, with a strong order backlog across all regions.
Bollore lost 5.4% after the French conglomerate reported full-year results.
Siemens (ETR:SIEGn) gained 1.2% after the engineering company said it would cut 5,600 jobs from its flagship digital industries business.