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Europe’s defence sector extended a blistering rally on Monday as investors raised their bets that governments across the continent will have to boost military spending and shoulder more of their burden for their security.
Shares in Rheinmetall, Germany’s largest defence company, jumped 11.1 per cent, London-based BAE Systems was up 14.3 per cent in London and Leonardo climbed 11.3 per cent in Milan. Paris-listed Thales surged 12.4 per cent, while Sweden’s Saab was up 9.2 per cent.
The Stoxx Europe aerospace and defence index was up 7 per cent, putting it on track for its biggest one-day gain since November 2020.
The sector-wide 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 President Donald Trump’s explosive row with 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.
“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.
Monday’s gains add to a record-breaking run for a sector that was shunned by many European investors before Russia’s full-scale invasion of Ukraine in 2022.
The Stoxx Europe aerospace and defence index has climbed more than 30 per cent this year as the region’s governments signal 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 and modelled on the European Bank for Reconstruction and Development.
Order books of some of Europe’s defence contractors had already hit record highs in the wake of the 2022 invasion.
The gains for the sector extended beyond the region’s biggest contractors on Monday. London-listed Chemring, one of a handful of explosives manufacturers in Europe, rose 2.8 per cent, and Norway’s Kongsberg Gruppen jumped 13 per cent in Oslo.
The moves also come as Germany’s chancellor-in-waiting Friedrich Merz seeks to rush through a multibillion-euro top-up to the defence budget. He wants approval from the centre-left SPD 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 Jim Reid, an analyst at Deutsche Bank.
However, some analysts cautioned that the initial market reaction is a stretch as European fiscal policy tends to proceed slowly, while the proposed spending is 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 analyst at asset manager T Rowe Price.
Eurozone bond yields rose on the prospect of greater defence spending, with the benchmark 10-year German Bund yield up 0.05 percentage points at 2.44 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 2-year equivalent reached as high as 0.41 percentage points on Monday, its highest level in more than two years.
Mohit Kumar, an analyst at Jefferies, said investors were convinced that “Europe has little choice but to increase defence spending”.
