European shares break record highs on Ukraine peace hopes

By Nell Mackenzie and Tom Westbrook

LONDON/SINGAPORE, Feb 18 (Reuters) - Asian shares and the dollar steadied on Tuesday, as traders waited on a rate cut in Australia and company earnings in China, while European shares marked record highs on the prospect of ramping up defence spending to back up any Ukraine peace deal.

The Australian dollar stood near a two-month high ahead of a central bank rate decision due at 0330 GMT. Markets have priced about an 89% chance of a 25 basis point rate cut.

S&P 500 futures were up 0.2% and European futures were flat in Asia morning trade. Japan's Nikkei rose 0.3%.

Overnight, the pan-European STOXX 600 index closed 0.5% higher as a gauge of defence and aerospace stocks surged 4.6% to lifetime peaks, having already more than doubled in value since Russia invaded Ukraine three years ago.

Investors expect earnings in the industry to continue to rise strongly, driven by a significant surge in defence budgets to meet new security needs - which analysts have dubbed a "super cycle" for the sector.

"A resolution to the conflict in Ukraine could deliver positive growth impulses for Europe, including improved consumer confidence, lower energy prices, and easier financial conditions," Bruno Schneller, managing director at Erlen Capital Management.

US markets were closed overnight for a public holiday.

Europe's banks were also in demand, up 1% and flying to 17-year highs, helped by a rise in bond yields.

French President Emmanuel Macron on Monday hosted an emergency summit on Ukraine after US officials suggested Europe would have no role in any talks this week in Saudi Arabia aimed at ending the conflict.

Britain said it was ready to send peacekeeping troops to back up any deal, while Russian and US officials prepared to meet for their own competing talks on Tuesday in Saudi Arabia.

Ukraine's President Volodymyr Zelenskiy said on Monday that the country would not recognise any decisions made in deliberations where they were not present.

DELAYED THREATS

In China, markets have been buoyed by Monday's rare meeting between President Xi Jinping and business leaders. Hong Kong's Hang Seng rose slightly at the open.

Shares in Baidu steadied following their slide on Monday after the founder of the search engine giant was not spotted at the meeting. The company reports earnings later in the day. Alibaba is due to report later in the week.

BHP shares ticked 0.6% higher after the global miner logged its lowest first-half profit in six years, but said it saw signs of economic recovery in China.

The imminent threat of reciprocal US tariffs has receded until April, but the risk that they might include levies based on value-added taxes in other countries was a major worry.

The Financial Times reported on Sunday that the European Commission would explore tough import limits on certain foods made to different standards in an effort to protect its farmers, echoing US President Donald Trump's reciprocal trade policy.

The rest of the week is filled with key data releases, including February flash business activity data across the globe while in Europe, markets also have their eye on German elections this weekend.

The euro hovered just below $1.05, while the yen was firm at 151.74 after solid growth data bolstered chances of a rate hike in Japan in coming months.

The pound traded at around $1.26033, just below its highest level in two months, as investors looked towards employment and inflation data later in the week.

In commodity markets, gold came off Friday's record highs at $2,895 an ounce having rallied for seven weeks straight.

Oil producer group OPEC+ is considering pushing back a series of monthly supply increases due to begin in April despite calls from Trump to lower prices, Bloomberg News reported on Monday, citing delegates.

Brent held overnight gains at $75.16 an ounce.

(Reporting by Nell Mackenzie; Editing by Ed Osmond, Angus MacSwan and Sam Holmes)