European defense stocks surged, while government bond prices fell sharply on Monday, as investors bet that the continent will need more defense spending as the U.S. cools on its military support for the region.
The STOXX Europe 600 index XX:SXXP rose 0.3% to flirt with Friday’s record intraday highs as Sweden’s Saab AB SE:SAAB.B SAABY jumped 11%, Germany’s Rheinmetall XE:RHM RNMBY climbed 9%, Britain’s BAE Systems UK:BA BAESY rose nearly 7%, Italy’s Leonardo IT:LDO FINMY added 6% and France’s Thales FR:HO THLLY advanced more than 5%.
The STOXX Europe Total Market Aerospace & Defense Index XX:SXPARO rose 0.7% to a record high. This index can be tracked by U.S. investors using the Select STOXX Europe Aerospace & Defense ETF EUAD.
The moves came after NATO Secretary General Mark Rutte said over the weekend that members will have to spend “considerably more than 3%” of their GDP on defense.
The target for NATO member’s spending is currently 2% of GDP, though U.S. President Donald Trump has said that allies should commit to 5% as he has made it clear that European countries should shoulder more of the burden for the continent’s security.
European leaders attended a hastily-convened summit in Paris on Monday as they looked to present a united front as a new regional security architecture evolves. Many of Europe’s capitals are worried that Trump will make a deal with Russia’s President Vladimir Putin to end the Ukraine conflict that will not take allies’ concerns into account.
“So, in terms of European geopolitics it’s been a huge last few days with potentially large ramifications ahead, and maybe we’ll look back on them as a big catalyst to higher European defense spending,” said Jim Reid, strategist at Deutsche Bank.
Shares in defense companies had already rallied hard since Russia’s full-scale invasion of Ukraine in February 2022, as investors took the view that the event would spur governments around the world to fortify their own defenses, according to Russ Mould, investment director at AJ Bell.
