Defence stocks soar in Europe as Trump-cowed leaders look at spending boost

European defence stocks surged on Monday as governments faced pressure to hike military spending in the region, following calls from Washington for higher expenditure ahead of talks between the US and Russia on a possible Ukraine peace deal.

The UK's deeply unpopular Prime Minister Keir Starmer said on Monday it was crucial for all of Europe to spend more on defence, while Brussels could make it easier for countries to increase their defence budgets, even those that are heavily indebted.

German arms maker Rheinmetall gained as much as 11 per cent to a record high, while Sweden's Saab and Britain's BAE Systems advanced 11 and six per cent respectively.

Italy's Leonardo and France's Thales both rose more than five per-cent, while Thyssenkrupp, which is looking to spin off its warship division TKMS, rose nearly 20 per cent to its highest in more than a year.

French President Emmanuel Macron, facing awful popularity polling of his own, will host European leaders including Starmer on Monday for an emergency summit on the Ukraine war.

"It is clear to us that the ability of European countries to influence peace talks will be directly proportional to the additional military support that they will be able to provide to Ukraine," Mediobanca Securities said in a note.

On Friday, the EU's controversial Ursula von der Leyen proposed to exempt defence from EU limits on government spending by activating a so-called escape clause. This would enable member states to boost spending without risks of triggering an excessive deficit procedure.

"Europe needs to increase its defence spending, and we'll be keeping a close eye on how this affects national budgets," said Alberto Conca, chief investment officer at Swiss asset manager LFG+ZEST.

"Defence stocks are a theme that's likely to continue to gain momentum. They've already performed well, but I believe they still have room to run," he added.

US President Donald Trump has been vocal in demanding to lift the NATO spending target to five per cent of GDP in defence from the two per cent threshold agreed in 2006.

EU member states' total defence expenditure is expected to have risen more than 30 per cent to 326 billion euros ($342 billion) in 2024, with average spending in line with the two per cent NATO commitment, Banca Akros said. However, some states, such as the Netherlands and Italy, still fall short of this target.

Gains in defence stocks drove a broader gauge of aerospace and defence companies up more than three per cent to a record high. This index has more than doubled since Russia invaded Ukraine three years ago. The index was up for a seventh straight day.

The broader STOXX 600 index edged up 0.2 per cent on the day. Meanwhile on European bond markets, the prospect of debt issuance to fund more military spending drove yields higher.

(Reporting by Danilo Masoni; Additional reporting by Christoph Steitz; Editing by Amanda Cooper and David Holmes)