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The European defence sector extended its furious rally on Monday as investors raised bets that governments across the continent must boost military spending and take on more burdens for security.
Shares in Rheinmetall, Germany’s largest defense company, rose 11.7%, while Leonardo rose 11.6% in Milan. Thales, listed in Paris, surged 13.2%, the BAE system rose 14.3%, and Swedish serve increased 10.8%.
The Stoxx Europe Aerospace and Defense Index rose 7.9%, and was on track for its biggest day-to-day profit since November 2020, but European government bonds sold in anticipation of increased spending.
“Obviously there is a need for (defensive) spending with a ring fence and there is an appetite to fund this from an investor’s perspective,” said Guymiller, chief market strategist in Zurich.
The move follows the summit of European leaders on Sunday in London as British and French leads try to save hopes for a peace deal in Ukraine following the explosive explosion of Ukrainian President Donald Trump on Friday.
European leaders are increasing pressure to boost defense spending after the Trump administration refused to provide US security guarantees.
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Eurozone bonds are rising, with the benchmark 10-year German band rising 0.12 percentage points at 2.5%. Yields move in reverse to price.
Investor expectations for higher issuances have driven the sharp capacity of the yield curve in recent weeks. The spread of German debt for 10 years worth of two years reached 0.43% points on Monday, reaching its highest level in more than two years.
The euro rose 0.9% at $1.047, following reports on Monday that Zelenskyy expressed his willingness to meet Trump again for “serious talks” and helped eurozone inflation data slightly stronger than expected.
The rise in stock prices on Monday adds to a record run in the defense sector avoided by many European investors in 2022 before Russia’s full-scale invasion of Ukraine.
The Stoxx Europe Aerospace and Defense Index rose more than 30% this year as it suggests that local governments will spend more security in the wake of the biggest restructuring of US foreign policy since World War II.
Policymakers are considering several options to increase spending, such as setting up a European maintenance bank to leverage the European savings pool, which is modelled by the European Bank for reconstruction and development.
Investors are convinced that “Europe has no choice but to increase defensive spending,” said Mohit Kumar, Jeffries economist.
Orders for some European defense contractors had already reached record highs in the wake of the 2022 full-scale invasion of Ukraine.
Sector profits expanded beyond the region’s largest contractors on Monday.
London’s FTSE 100 rose 7.1% to win a fresh record with defence stocks, including Chemring, one of Europe’s few explosive manufacturers. Norway’s Kongsberg Gruppen rose 14.4% in Oslo.
The move comes as Germany’s waiting list Friedrich Merz is aiming to rush a billion-euro top-up to the country’s defense budget. He wants approval from the Social Democrats on the centre left, and is using the resigning Congress to vote through the constitutional changes needed to increase military spending by more than 100 billion euros.
“It appears that there is a paradigm shift in Germany,” says Robin Winkler, an economist at Deutsche Bank.
However, some analysts warned that initial market responses were growing as European fiscal policy tends to progress slowly, but proposed spending spread over the years.
“The rise in defense spending, rather than Big Bang Market expects, is likely to be slow and stable,” said Tomasz Wieladek, economist at Asset Manager T Rowe Price.
Additional Reports by Ray Douglas
