EU Defence Budget Boosts Stocks

European equity markets rose on Monday, 17 February, boosted by defence stocks after officials met in Paris unexpectedly to discuss increasing military spending in the event of a ceasefire deal in Ukraine. 

The European Stoxx 600 index (FXXP) marked another all-time high alongside Germany's DAX 40 index (FDAX), while the UK's FTSE 100 (UK100) and France's CAC 40 (FCE) grew 0.41% and 0.13%, respectively.

Notable European stock gainers included Germany's Renk Group and Rheinmetall (RHM.DE), which climbed 16.57% and 14%, respectively. Swedish defence manufacturer Saab rose 16.17%, and the UK's BAE Systems (BA-L) soared 7.9%.

This all comes following remarks made at the Munich Security Conference on Monday, suggesting that NATO defence spending targets should exceed 3% of countries’ GDP from the current 2% target.

The focus on European markets is likely to remain due to geopolitical tensions between the US and Europe as US officials prepare for talks with Russia to end the war in Ukraine.

EU, Ukraine Left Out of Peace Talks

European leaders gathered on Monday to discuss a new defence package to support Kyiv as well as broader regional security issues amid growing concerns that the US may even exclude the EU from peace negotiations. 

US special envoy to Ukraine Keith Kellogg recently said that Europe’s leaders would not be part of discussions between the US and Russia over ending the war, arguing that previous negotiations had failed due to the involvement of too many parties. 

Meanwhile, US Secretary of State Marco Rubio confirmed that he would meet Russia’s Sergey Lavrov in Saudi Arabia this week, the week starting 17 February. Ukraine’s Volodymyr Zelensky, on the other hand,  said that Kyiv received no invitation to these talks.

With the meeting looming large, European Commission President Ursula von der Leyen proposed exempting defence from EU government spending limits at the Security Conference to help overcome barriers to boosting defence expenditure. She said that EU member states currently spend a combined 2% of their GDP on defence, stressing that this would need to increase by "hundreds of billions of euros" every year.

Along with the emergency meeting called by French President Emmanuel Macron in Paris, Leyen's announcements were viewed as positive for European defence stocks.

NATO Calls for Higher Defence Budget

During the Security Conference, NATO Secretary General Mark Rutte said spending targets would be "considerably more than 3%" of GDP from the 2% agreed and maintained since 2014, when it convenes on 24-25 June in Hague. (Source: Euronews)

Notably, US President Donald Trump urged NATO's European members in January to spend 5% of their national income on defence, arguing that the US is taking an oversized responsibility for maintaining peace in the region.

Meanwhile, Europe has overtaken the US in terms of aid provided to Ukraine, collectively allocating €70 billion in financial and humanitarian assistance and another €62 billion in military aid. In contrast, the US has committed €64 billion in military aid and €50 billion in financial and humanitarian allocations.

Yet, Rutte’s comments solidified the view that debt issuance in Europe will need to increase as European leaders prepare to pass the cost of a lasting peace deal between Ukraine and Russia to their nations. 

“Supercycle” in Sight for EU Defence Stocks?

Bloomberg estimates that upgrading European defence and protecting Ukraine may cost Europe's major powers as much as an additional $3.1 trillion over 10 years. 

Notably, a new NATO spending target would suggest an expansion of Europe's defence industry, limiting the scope for increased purchases of US-made systems.

Some European stocks have already more than doubled since the war in Ukraine. However, the hopes of an end to the Ukraine war, which comes with new defence budgets and security guarantees, pushes some analysts to dub a potential resolution as the beginning of a new “supercycle”. This is especially relevant as lower energy prices, easier financial conditions and improved consumer confidence are being considered.

Meanwhile, on Monday, European stocks received a partial boost from China, a key European export market. President Xi Jinping met business leaders, including Alibaba (BABA) co-founder Jack Ma, raising hopes that a years-long crackdown on the private sector may soon end. (Source: Swissinfo.ch)

Conclusion

European defence stocks witnessed strong gains on Monday as sentiment around the region appears to signal a broader increase in military expenditure towards a new era of defence spending.

With leaders backing higher defence budgets and geopolitical tensions pushing decades-old spending targets upward, investors have jumped on the emerging narrative. However, this does not imply a continuation of the trend, and the risk for investors and traders alike can remain high.

The ongoing political talks are likely to dictate market performance, with Europe’s defence sector hinged on upcoming developments, including the progress of ceasefire talks, the increase in defence spending, and how hard President Trump forces US arms sales into the hands of the EU.