The initiation of talks between the US and Russia has been viewed positively by financial markets, as it signals the potential for a reduction in geopolitical risks and the end of a costly and bloody conflict. However, the market’s reaction in the weeks ahead will largely depend on the nature of the agreement and the degree to which Ukraine and Europe are included in the final terms.

• Ceasefire impact: Even if only a ceasefire is reached, markets are likely to respond positively in the short term, as the immediate risk of escalation would be reduced. However, the broader economic benefits may be limited if European sanctions remain in place and trade with Russia continues to be restricted.
• Comprehensive peace agreement: If a comprehensive peace agreement is reached and endorsed by all parties, the financial benefits would be noticeable. The lifting of sanctions, particularly those affecting energy and trade, would provide a boost to European economies. Additionally, a potential normalisation of relations with Russia could support global commodity prices, ease energy supply constraints, and improve sentiment toward European financial assets.

This is a constantly evolving situation, with a wide range of potential outcomes still in play. While significant uncertainties remain, the initiation of peace talks is an encouraging development. If and when a resolution is reached, it would likely lead to the gradual lifting of sanctions, improved energy flows, and increased reconstruction efforts—providing much-needed support to Europe's struggling economy. From an investment perspective, the possibility of a meaningful and lasting resolution should not be overlooked.

The ongoing developments can prove to be positive for European equity markets, in a context that had already become more favourable since the beginning of the year. Indeed, after a challenging second half of 2024, Europe’s macroeconomic backdrop has stopped deteriorating recently, with reassuring PMI indices and positive economic surprises in early 2025. Short-term recession risks are dissipating, and growth is stabilising, even if it remains very weak in “core” economies.

Sentiment could further improve following Germany’s elections and the prospect of additional fiscal support. One of the key uncertainties heading into the elections is whether fringe parties will be able to block a reform of the constitutional debt brake by gathering one-third of the Bundestag’s seats. If they do, prospects of fiscal support might be lowered but the increasingly likely option of excluding defence spendings from deficit limits would still allow for some positive impulse from government policy. Meanwhile, while uncertainty over US tariffs on European goods remains, the threat of sharp tariff hikes has diminished, as they seemed to serve President Trump as a bargaining tool for extracting concessions from other countries.

In parallel, despite the recent re-rating, European equity valuations remain attractive compared to the US market, and equity earnings growth is projected to accelerate, with the stabilising macro environment reducing downside risks to these expectations.

The picture may be more complex when it comes to the impact on European interest rates, as European long-term rates may experience upward pressures from a positive evolution in the Ukraine situation. The combination of potentially improved growth prospects in Europe, and of higher public debt to finance defence spendings, might reduce the appeal of EUR long-term government bonds. This could be especially true for Germany, which stands out among European peers as a country with low public debt (62% of GDP, well below the 87% average level of the Eurozone) and the weakest growth of the monetary union over the past two years. Potentially rising public debt and improved growth prospects could push German government yields upward, especially if it comes along with the introduction of joint European borrowings to finance the rise in defence spendings. A steepening of the EUR yield curve could therefore be expected and warrant to position on short-to medium term maturity bonds.

However, better economic growth prospects for Europe would likely be supportive for some corporate bonds. A potential peace agreement would largely impact the European gas market, as renewed access to Russian gas imports could lower cost of energy and electricity feedstock, directly benefiting utilities and indirectly supporting energy-intensive industries. Currently, the energy costs in neighbouring countries remain elevated comparing to pre-war levels. By sector, European utilities that previously relied on low-cost Russian gas for electricity generation would be direct beneficiaries if Russian gas flows resume, reducing imports of expensive LNG (liquefied natural gas) overseas. Energy and gas transmission companies in neighbouring countries would also benefit from more stable pricing and increased energy exports to Ukraine for reconstruction. Additionally, defence companies in Europe, particularly those with strong government backing, could see higher demand for military aircraft, helicopters, armoured vehicles, and naval systems. Specific cases on banks and corporates that have maintained their Russian exposure may also see asset revaluations. Finally, a ceasefire would provide Ukraine with an opportunity to attract foreign investment, and Ukrainian corporates with viable business to resume access to capital market.