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Europe’s defense sector expanded a bubble rally on Monday as investors bet that governments across the continent must increase military spending and take more burdens for their security.
Rheinmetall, Germany’s largest defense company, rose 11.9%, London-based BAE Systems rose 14.3% in London and Leonardo rose 11.4% in Milan. Paris-listed Thales soared 11.6%, while Sweden’s Saab rose 10.6%.
The STOXX European Aerospace and Defense Index rose 6%, bringing its biggest one-day gain since November 2020 on track.
British and French leaders tried to reach a peace deal in Ukraine after an explosive dispute between Donald Trump and Volodymyr Zelenskyy on Friday after a European Leaders Summit in London on Sunday.
European leaders are under pressure to increase defense spending after the Trump administration refuses to provide U.S. security assurances, widely regarded as any deterrent effect on future Russian aggression.
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“Obviously necessary [defence] Guy Miller, chief market strategist at Zurich, said:
Monday’s earnings increased a record-breaking industry that was shunned by many European investors, ahead of Russia’s full-scale invasion of Ukraine in 2022.
The STOXX European Aerospace and Defense Index has climbed more than 30% this year as governments in the region say they will spend more on security after the biggest readjustment of U.S. foreign policy since World War II. Policymakers are considering several options for increasing spending, including the establishment of European heavy banks to leverage Europe’s savings pools and modeled on the reconstruction and development of European banks.
After the 2022 invasion, some European defense contractors have reached record highs.
On Monday, the industry’s earnings expanded to the region’s largest contractors. The London-listed chemical forest is one of the few explosives manufacturers in Europe, up 4.6%, while Norway’s Kongsberg Gruppen rose 13.3% in Oslo.
This move also occurred, with German Chancellor Friedrich Merz trying to hurry up to catch up with the billions of euros in the defense budget. He hopes to get approval from the left-wing SPD to vote using the outgoing federal government to vote through constitutional changes needed to increase military spending by more than 10 billion euros.
“It seems like a paradigm shift has taken place in Germany,” said Deutsche Bank economist Robin Winkler.
However, some analysts warn that the initial market response trends were initially reflected as European fiscal policy tends to go slowly and proposed spending spread over a period of years.
“The rise in defense spending could be slow and steady, rather than what the Big Bang market expects,” said Tomasz Wieladek, an economist at asset manager T Rowe Price.
Eurozone bond yields have increased the prospect of defense spending, with the benchmark 10-year German appearance yield rising by 0.12 percentage points to 2.5%. The rate of return is inversely proportional to the price.
Investor expectations for higher issuances have driven a steep trend in the production curve in recent weeks. On Monday, Germany’s two-year 10-year debt spreads to 0.41 percentage points on its two-year equivalent education, the highest level in more than two years.
Mohit Kumar, an economist at Jefferies, said investors firmly believe that “Europe has no choice but to increase defense spending.”
Other reports by Ray Douglas
