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The European defense sector surged on Monday, with the euro also gaining as investors bet on increased military spending across the continent and a heightened focus on security.
Shares in Rheinmetall, Germany’s largest defense company, soared by 14%, while Milan-based Leonardo climbed 15.4%. Thales in Paris rose 15%, BAE Systems gained 14.3%, and Sweden’s Saab increased by 11.3%.
The Stoxx Europe Aerospace and Defense Index surged 8.4%, marking its strongest rally since November 2020, while Germany’s DAX rose 3.3%, its biggest gain in over two years. European government bond yields also rose, reflecting expectations of higher spending.
“It’s clear that [defense] spending and financing appetite from investors will need to grow,” said Guy Miller, chief market strategist in Zurich.
These moves followed a European leaders’ summit on Sunday, as the UK and France sought to salvage hopes for a peace agreement in Ukraine. This comes after a tense exchange between US President Donald Trump and Ukrainian President Volodymyr Zelenskyy on Friday.
European leaders face growing pressure to boost defense spending after the Trump administration declined to provide security guarantees, which are widely seen as essential to deterring future Russian aggression.
Eurozone bond yields climbed, with the 10-year German bund rising 0.12 percentage points to 2.52%. Yields move inversely to prices.
Investor expectations of higher spending have driven a sharp rally in recent weeks. The yield gap between Germany’s 10-year and two-year bonds widened to 0.43 percentage points on Monday, its highest level in over two years.
The euro rose 1.2% to $1.049 amid reports that Zelenskyy expressed willingness to meet Trump for “serious talks” on Monday. Stronger-than-expected eurozone inflation data also supported the currency.
Monday’s gains extended a record run for the defense sector, which many European investors had avoided before Russia’s full-scale invasion of Ukraine in 2022.
These gains also fueled a broader rally in European markets. The STOXX 600 rose 1%, while London’s FTSE 100 gained 0.9%, driven by BAE Systems’ surge, with both indices hitting fresh record highs.
In the US, defense stocks trailed the European rally. L3Harris Technologies and Lockheed Martin rose just 0.7% and 1.2%, respectively, in New York.
Year-to-date, the Aerospace and Defense Index has climbed over 30% as regional governments signaled plans to increase security spending to levels not seen since World War II, reflecting a major shift in US foreign policy.
Policymakers are exploring various ways to boost spending, including the creation of a European Defense Fund modeled after the European Bank for Reconstruction and Development.
Investors are convinced that “Europe has little choice but to increase defense spending,” said Mohit Kumar, an economist at Jefferies.
Order books for some European defense suppliers have already hit record highs following the 2022 invasion of Ukraine.
Monday’s gains were led by the region’s largest defense contractors.
The rally also coincided with reports that Germany’s incoming chancellor, Friedrich Merz, is pushing for a multi-billion-euro boost to the country’s defense budget. He seeks approval from the center-left Social Democratic Party to amend the constitution and increase military spending by over €100 billion.
“It seems a paradigm shift is underway in Germany,” said Robin Winkler, an economist at Deutsche Bank.
However, some analysts warned that the market’s initial reaction might be overblown, as European fiscal policy tends to move slowly, and proposed spending would be spread over several years.
“Defense spending is likely to increase gradually, not in the big bang some markets are expecting,” said Tomasz Wieladek, chief economist at T. Rowe Price.
Additional reporting by Ray Douglas
