European Markets Rally as Defense Stocks Surge Amid Security Talks

Defense Spending Boost Sends Aerospace Shares Soaring

European markets traded higher on Monday as defense stocks surged, fueled by regional security discussions that signaled increased military spending. The Stoxx 600 index saw mixed movements in early trading but was up 0.59% by mid-morning in London, driven by strong gains in aerospace and defense stocks.

The Stoxx Europe Aerospace and Defense Index climbed nearly 6%, marking its strongest session in five years. The bullish momentum followed a weekend of high-profile security talks in London, where leaders pledged increased defense spending and long-term support for Ukraine.

Key Stock Movers: BAE Systems, Rheinmetall, Rolls-Royce Lead the Gains

• BAE Systems soared 12.8%, making it one of the day’s biggest gainers, as JP Morgan analysts upgraded their price target on the stock.
• Germany’s Rheinmetall climbed 10.8%, reflecting strong investor confidence in defense spending commitments.
• Sweden’s Saab, Italy’s Leonardo, and France’s Thales also saw significant gains, pushing the defense sector higher.
• Rolls-Royce, which recently reinstated its dividend after a record-breaking high, added another 5.3%.

London Security Summit Sparks Market Optimism

British Prime Minister Keir Starmer hosted a Ukraine-focused security summit over the weekend, which played a crucial role in bolstering defense stocks. The event came in the wake of a tense exchange between U.S. President Donald Trump and Ukrainian President Volodymyr Zelensky last week.

During the summit, European leaders reinforced their commitment to military support for Ukraine, with the UK announcing a significant increase in defense spending. This sentiment was echoed by other nations, fueling expectations of higher military budgets across Europe.

Reports also suggested that Germany’s next government is considering creating a €400 billion ($416 billion) defense and infrastructure fund, which could mark a historic fiscal shift.

“This would be a fiscal regime shift of historic proportions,” said Robin Winkler, Chief Germany Economist at Deutsche Bank, in a research note.

Thales Stock Jumps 11.3% on Cybersecurity Deal

Shares of French cybersecurity giant Thales surged 11.3% following the announcement of a strategic partnership with Germany’s SHIFT—a sustainable mobile handset manufacturer. The deal will see Thales’s eSIM technology integrated into SHIFT’s next-generation smartphones, further boosting the company’s presence in the digital security market.

Euro Zone Inflation Dips, But Still Above Expectations

Fresh economic data released on Monday showed that euro zone inflation eased to 2.4% in February, slightly above the 2.3% forecasted by analysts.

• Inflation fell from 2.5% in January, but the drop was less than anticipated, raising questions about the European Central Bank’s (ECB) next policy move.
• ECB policymakers remain confident that inflation is on a downward trajectory but acknowledge lingering risks to price stability.

Euro Zone Manufacturing Shows Signs of Stability

Despite an ongoing downturn, euro zone manufacturing activity improved in February, reaching its least severe contraction level in two years.

• The Purchasing Managers’ Index (PMI) rose to 47.6, up from 46.6 in January, signaling that while the sector is still in contraction, stabilization may be underway.
• Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted that new orders are declining at their slowest pace since May 2022, raising hopes for a potential recovery in the coming months.

“It’s too early to call it a recovery, but the PMI hints that manufacturing might be finding its footing,” said de la Rubia.

He added that political stability in France, swift government formation in Germany, and a resolution of U.S.-EU tariff disputes would further aid the recovery.

Global Markets: U.S. and Asia-Pacific Investors Eye Tariff Developments

• U.S. stock futures edged higher early Monday as investors awaited clarity on President Trump’s proposed tariffs on major trading partners.
• Reports suggest the 25% tariff on Mexico and Canada could still be adjusted, with U.S. Commerce Secretary Howard Lutnick saying the rate remains “fluid”.
• An additional 10% duty on Chinese imports, however, is reportedly finalized.

Conclusion: Defense Surge Fuels European Markets Amid Economic Uncertainty

European markets are seeing a strong defense-driven rally, fueled by government pledges for increased military spending and a renewed focus on security policies. While economic concerns persist, particularly with stubborn inflation and manufacturing weakness, investors are betting on fiscal expansion and geopolitical stability to drive further gains.

As markets digest the outcomes of key policy discussions in both Europe and the United States, traders will be closely watching the ECB’s interest rate decision on Thursday and further developments on global trade tariffs.