Europe’s defence sector saw a major rally on Monday, with stocks surging as investors bet on increased military spending across the continent. The gains came after US President Donald Trump’s refusal to guarantee European security, forcing European leaders to rethink their defence strategies and funding.
Defence stocks hit record highs
Shares in major European defence companies soared, with Germany’s Rheinmetall closing up 15%, Leonardo in Milan gaining 17.3%, and France’s Thales surging 16.7%. BAE Systems climbed 14.3%, and Sweden’s Saab rose 11.6%. The Stoxx Europe aerospace and defence index jumped 8%, marking its biggest one-day gain since November 2020. Meanwhile, Germany’s Dax surged 2.6%, its largest rise in over two years.
The surge follows a high-stakes summit in London on Sunday, where European leaders, led by the UK and France, attempted to salvage a peace deal for Ukraine. The urgency for increased military spending intensified after Trump’s heated Oval Office confrontation with Ukrainian President Volodymyr Zelenskyy, raising fears that the US may withdraw its support for European security.
Rising bond yields and a strengthening euro
Investor expectations of higher defence spending caused European government bonds to sell off, pushing the 10-year German Bund yield up 0.1 percentage points to 2.49%. The spread between 10-year and two-year German debt reached its highest level in over two years.
The euro strengthened by 1.2% to $1.046, supported by reports that Zelenskyy had expressed willingness to meet with Trump for further discussions and by slightly stronger-than-expected Eurozone inflation data.
Europe’s growing defence commitment
The defence sector’s rally extends a record-breaking run that began after Russia’s full-scale invasion of Ukraine in 2022. European defence stocks have surged over 30% this year, as governments signal a shift toward greater military spending.
Policymakers are exploring options to finance this expansion, including a proposed European rearmament bank that would tap into Europe’s savings pool, modelled on the European Bank for Reconstruction and Development.
Germany’s military spending push
Germany is at the forefront of this shift, with Chancellor-in-waiting Friedrich Merz pushing for a multibillion-euro top-up to the country’s defence budget. He is seeking parliamentary approval for a constitutional change to boost military spending by over €100bn.
Robin Winkler, an economist at Deutsche Bank, described this as a “paradigm shift” in Germany’s approach to defence.
A cautious outlook on spending
Despite the market’s enthusiasm, some analysts warn that European fiscal policy tends to move slowly. While significant increases in defence spending are expected, they are likely to be gradual rather than immediate.
Tomasz Wieladek, an economist at asset manager T Rowe Price, noted that “the rise in defence spending is likely to be slow and steady, rather than the Big Bang markets expect.”
As Europe prepares to take greater responsibility for its own security, the region’s defence industry stands to benefit, while uncertainty over US commitments continues to loom large.
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