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Europe's backing for Ukraine 'turbocharges' arms shares
Published by Global Banking & Finance Review®
Posted on March 3, 2025
4 min readLast updated: January 25, 2026
Global Banking & Finance Review®
Company
Published by Global Banking & Finance Review®
Posted on March 3, 2025
4 min readLast updated: January 25, 2026
European arms shares surge as increased defence spending supports Ukraine, impacting stocks and bond yields.
By Amanda Cooper, Dhara Ranasinghe and Paolo Laudani
LONDON/GDANSK (Reuters) -Investors piled into European arms manufacturer shares and punished long-dated government bonds on Monday, following the clearest sign yet the region's leaders were racing to increase defence spending and help to secure peace in Ukraine.
A flurry of European diplomacy, including an agreement to spend more on defence, followed an acrimonious meeting between President Volodymyr Zelenskiy and U.S. President Donald Trump on Friday.
The euro rose by as much as 0.7% to $1.045, as investors flocked to the European equity market, where an index of aerospace and defence companies hit record highs.
Europe has faced pressure to spend more on its security following Russia's invasion of Ukraine three years ago, and the need to act has become urgent, as the Europeans, including Ukraine, have been sidelined in talks between Washington and Moscow.
Reuters reported on Monday that parties in talks to form Germany's new government are considering setting up a defence fund. Investors sold off 30-year German debt, which pushed yields up by more than 10 basis points.
"It is an inflection point and Europe realises it needs to do the heavy lifting (on defence and security)," RBC Capital Markets Global Macro Strategist Peter Schaffrik said.
"The German elections have opened the door for more spending. The whole Zelenskiy-Trump meltdown has fast forwarded everything."
Francois Savary, chief investment officer at Genvil Wealth Management, agreed.
"We are nearing a tipping point if they (European leaders) get their act together," he said. "My bet is something is going to come, as the pressure is building."
By mid-morning in Europe, shares in the region's biggest defence company BAE Systems had risen around 15%, while those in Germany's Hensoldt, which provides sensor systems for the Eurofighter, jumped 22% to a record high.
Leopard 2 tank maker Rheinmetall rose 12%, while Italy's state-controlled defence group Leonardo jumped 11% and Europe's largest defence technology company Thales was up around 13%.
JPMorgan analysts said the events of the last two weeks have "turbocharged" their thesis of a European rearmament cycle.
"There are 30 European countries in NATO and we expect many of them will soon commit to much higher defence spending," they said in a note.
The EU believes 500 billion euros ($523 billion) in investments are needed over the next decade. But raising defence spending to 3% of output would require nearly 200 billion euros per year more.
BONDS SELLOFF
Long-dated government borrowing costs soared in France, Italy and Britain too, as investors sold bonds on Monday.
Italian 30-year yields were up 7.4 bps at 4.28%, while French 30-year yields rose nearly 9 bps to 3.81% and 30-year gilts rose 5 bps to 5.14%.
Germany's 30-year bond yields, up over 10 bps, were set for their biggest one-day jump since April.
Britain on Sunday announced an order for 5,000 lightweight multirole missiles (LMM) for Ukraine, trebling production of the air defence missiles at the Belfast factory of Thales.
And in Germany, two special funds potentially worth hundreds of billions of euros, one for defence and a second for infrastructure, are being mulled, Reuters reported.
Deutsche Bank Chief Economist Robin Winkler said a "paradigm shift" appeared to be taking place.
"Even if spent over 10 years, this would be about as much money as the country has invested in East Germany since reunification," Winkler said in a note.
"In other words, it would be a fiscal regime shift of historic proportions."
($1 = 0.9553 euros)
(Reporting by Paolo Laudani, Anna Pruchnicka in Gdansk and Amanda Cooper and Dhara Ranasinghe in London, additional reporting by Tim Hepher, editing by Alun John, Kirsten Donovan and Barbara Lewis)
European leaders have agreed to increase spending on defence following pressure from the ongoing Ukraine conflict, with discussions about establishing a defence fund in Germany.
Shares in major European arms manufacturers have surged, with BAE Systems rising around 15% and other companies like Rheinmetall and Leonardo also seeing significant increases.
Investors sold long-dated government bonds in France, Italy, and Britain, leading to a rise in yields, indicating a selloff in the bond market.
Analysts expect many NATO countries to soon commit to significantly higher defence spending, with estimates suggesting that around 500 billion euros in investments are needed over the next decade.
Deutsche Bank's Chief Economist mentioned that the proposed spending could represent a fiscal regime shift of historic proportions, comparable to the investments made in East Germany since reunification.
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