Rheinmetall MAN military vehicle in Donetsk Oblast, Ukraine, November 20, 2024.
Yan Dobronosov | Global Images Ukraine | Getty Images
European defense stocks fell on Monday, with losses widening after Ukraine and the United States made progress on a peace deal over the weekend.
The Stoxx European Aerospace and Defense Index fell 2.1% in morning trading, to its lowest level since July, according to LSEG data. The index ended Friday trading down more than 3.4%.
German Rheinmetall, Hensoldt, Lenk By around 10:35 a.m. London time (5:35 a.m. ET), both were down about 4%, dropping to the bottom of the pan-European Stoxx 600 index. Sweden’s Saab fell 3.5%.
Meanwhile, Europe’s benchmark natural gas price fell below 30 euros ($34.59) per megawatt hour on Friday morning, an 18-month low.
This comes after the United States announced on Sunday that progress had been made in peace talks over the weekend, which were attended by Secretary of State Marco Rubio, but no agreement was reached on Ukraine’s security.
In a joint statement released on Sunday, the United States and Ukraine said they agreed that the talks had been “very productive.”
The European Union has its own goal of ensuring sustainable peace in Ukraine. The European Commission, the European Union’s executive arm, said on Sunday that key conditions include no forced border changes or restrictions on Kiev’s military.
These elements appear to dispute some of the proposals put forward under the widely leaked US peace plan. The US had reportedly offered Ukraine to cede land, including Crimea, Luhansk and Donetsk, and to pledge never to join the NATO military alliance.
The plan also said that Kiev would receive “credible” security guarantees, while the size of Ukraine’s military would be limited to 600,000 soldiers, according to The Associated Press, which obtained a copy of the draft.
Analysts had questioned whether a U.S. plan considered favorable to Russia would receive support from Ukraine.
Structural location?
Analysts were somewhat surprised by the decline in European defense stocks.
Morningstar equity analyst Loredana Muharemi said on Monday that “market reaction to a potential peace deal has been exaggerated so far.”
“Even if a deal is reached, European defense ratings are supported not by short-term revenues from Ukraine, but by a structural increase in the European defense budget as a whole, so this area should not fall due to market shocks,” Muharemi said.
Separately, Ben Gutteridge, market insights strategist at Invesco, said it was “perfectly reasonable” to expect Russia could become more confident in its geopolitical strategy over the medium term.
“I would like to share that the structural story for buying defense stocks still seems to me to be here in some ways. The spheres of influence seem tighter than ever, so defensive stocks have a structural place in the portfolio,” Gutteridge said Monday on CNBC’s “Squawk Box Europe.”
“The geopolitical outlook looks somewhat positive in the short term, but remains unstable in the medium to long term,” he added.
