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Europe’s defence sector extended a blistering rally on Monday and the euro surged as investors raised their bets that governments across the continent will have to boost military spending and shoulder more of the burden for their security.
Shares in Rheinmetall, Germany’s largest defence company, closed up 15 per cent while Leonardo climbed 17.3 per cent in Milan. Paris-listed Thales surged 16.7 per cent, BAE Systems gained 14.3 per cent and Sweden’s Saab was up 11.6 per cent.
The Stoxx Europe aerospace and defence index jumped 8 per cent, its biggest one-day gain since November 2020, while Germany’s Dax surged 2.6 per cent, the biggest rise in more than two years. European government bonds sold off on expectations of higher spending.
“There is clearly a need for ringfenced [defence] spending and an appetite to fund this from an investor perspective,” said Guy Miller, chief market strategist at Zurich.
The moves follow Sunday’s summit of European leaders in London, as the UK and France lead attempts to salvage hopes of a peace deal in Ukraine following US President Donald Trump’s explosive row with Ukrainian President Volodymyr Zelenskyy in the Oval Office on Friday.
European leaders are under growing pressure to boost defence spending after the Trump administration refused to offer US security guarantees, which are widely regarded as a necessary deterrent to any future Russian aggression.
Eurozone bond yields rose, with the benchmark 10-year German Bund yield up 0.1 percentage points at 2.49 per cent. Yields move inversely to prices.
Investor expectations of higher issuance have driven a steepening in yield curves in recent weeks. The spread of 10-year German debt over its two-year equivalent reached as high as 0.43 percentage points on Monday, its highest level in more than two years.
The euro climbed 1.2 per cent to trade at $1.046 following reports that Zelenskyy on Monday had expressed willingness to meet Trump again for “serious talks” and helped by slightly stronger than expected Eurozone inflation data.
Monday’s share price gains add to a record-breaking run for a defence sector that was shunned by many European investors before Russia’s full-scale invasion of Ukraine in 2022.
They helped drive a broader rally across European markets. The Stoxx Europe 600 rose 1.1 per cent while London’s FTSE 100 hit gained 0.7 per cent, helped by BAE’s gains, with both indices hitting fresh record highs.
In the US, defence stocks were again left behind by the European sector’s rally. Shares in L3Harris Technologies and Lockheed Martin were up just 0.6 per cent and 0.9 per cent respectively in New York.
The Stoxx Europe aerospace and defence index has climbed more than 30 per cent this year as the region’s governments have signalled they will spend more on security in the wake of the biggest realignment of US foreign policy since the second world war.
Policymakers are looking at several options to increase spending, including setting up a European rearmament bank to tap into Europe’s savings pool that would be modelled on the European Bank for Reconstruction and Development.
Investors are convinced that “Europe has little choice but to increase defence spending”, said Mohit Kumar, an economist at Jefferies.
The order books of some of Europe’s defence contractors had already hit record highs in the wake of the invasion of Ukraine.
The gains for the sector extended beyond the region’s biggest contractors on Monday.
The moves also come as Germany’s chancellor-in-waiting Friedrich Merz seeks to rush through a multibillion-euro top-up to the country’s defence budget. He wants approval from the centre-left Social Democratic party to use the outgoing Bundestag to vote through the constitutional change required to boost military spending by more than €100bn.
“A paradigm shift appears to be taking place in Germany,” said Robin Winkler, economist at Deutsche Bank.
However, some analysts cautioned that the initial market reaction was a stretch as European fiscal policy tended to proceed slowly, while the proposed spending was spread over several years.
“The rise in defence spending is likely to be slow and steady, rather than the Big Bang markets expect,” said Tomasz Wieladek, an economist at asset manager T Rowe Price.
Additional reporting by Ray Douglas
