Peace Talk Optimism Clips Europe Defense Stocks as Markets Reopen

Defense slide sets tone for a muted European open

European shares opened slightly lower on Monday, Dec. 29, as markets returned from the Christmas week and investors trimmed exposure to the defense rally that has dominated parts of the region’s equity story. Early moves were modest at the index level, with the FTSE 100 down about 0.04%, France’s CAC 40 off roughly 0.06%, and Germany’s DAX down around 0.1% in morning trade.

The sharper action sat inside European defense stocks. Rheinmetall and Leonardo shares fell in early trading, with Leonardo down more than 4% and Rheinmetall down close to 3%, while BAE Systems slipped a little over 1%. Hensoldt also traded lower.

Peace plan headlines hit sector priced for multi-year rearmament

The immediate catalyst was politics rather than quarterly earnings. The market treated the weekend headlines as a step toward de-escalation in Ukraine, and defense names have been the cleanest hedge for investors positioning around sustained European rearmament and replenishment cycles.

That positioning is crowded for a reason: procurement contracts tend to be large, sticky, and visible, and order books can stretch years. Still, defense equities have also carried a “war-duration premium” tied to emergency orders, accelerated delivery schedules, and expanded munition production. Any credible path that reduces the probability of a prolonged high-intensity conflict can compress that premium quickly, even if budgets do not change overnight.

For investors, the mechanical question is timing. Government defense spending is set through multi-year plans, and equipment lead times are long, which supports revenue visibility into 2026–2027 for prime contractors and key suppliers. The equity reset comes from the marginal change in expectations: fewer rush orders, slower contract upgrades, and more political scrutiny of incremental spending increases once the near-term emergency fades.

Trump-Zelenskiy talks push a geopolitical factor into the Monday open

The shift in tone followed Trump Zelenskiy peace talks in Florida on Sunday, Dec. 28. Trump said the sides were “getting a lot closer” to an agreement, while acknowledging territorial issues remain unresolved. Zelenskiy said security guarantees are agreed in principle, and discussions centered on the Donbas as the main sticking point.

The talks also carried near-term calendar implications. European leaders have pointed to an early-January meeting in Paris to finalize security-related contributions, and Trump has said a clearer outcome could emerge within weeks.

That timeline matters because it intersects with how defense names are valued. A shorter negotiation window increases the likelihood of rapid repricing across “war-exposure” trades, including defense, European energy volatility hedges, and selected Eastern Europe assets. A longer, open-ended process tends to keep the premium embedded, because the tail risk remains live.

FX, energy and credit are the next market channels

Defense stocks are the first stop, but the broader Ukraine peace plan risk premium sits across assets that price disruption risk. In FX, a constructive path typically supports the euro at the margin and reduces demand for defensive positioning in regional pairs, though thin year-end liquidity can exaggerate intraday swings.

Energy is another channel. Any perception that conflict risk is easing tends to reduce the probability of fresh supply shocks linked to infrastructure attacks, shipping disruptions, or sudden policy shifts around sanctions and enforcement. The energy reaction is usually more sensitive to concrete policy statements than to general optimism, so traders will watch for specifics on enforcement, reconstruction financing, and the operational status of critical infrastructure, including Ukraine’s power system.

Credit pricing often moves more cleanly than equities when headline risk changes. A credible framework that lowers the likelihood of extended conflict can tighten spreads on Ukraine-linked instruments and reduce spillover risk premia for frontier and emerging-market sovereigns that sit in the same risk bucket. The flip side is that negotiations that stall on territory can reverse those moves quickly, because “close to a deal” is not the same as a deal that can be implemented and enforced.

Year-end trading amplifies sector rotation and single-name dispersion

With only a few sessions left in 2025, repositioning tends to happen through liquid sector baskets. That is why European equity sector rotation can appear sharper than headline index moves: investors can sell defense exposure quickly while keeping overall equity risk broadly unchanged.

Monday’s tape also reflected stock-specific news outside geopolitics. Asset manager GAM Holding opposed a proposed takeover of Honda unit Yutaka Giken by Samvardhana Motherson, arguing the offer undervalues the target. In the U.K., International Personal Finance became a focal point after a cash offer from BasePoint Capital at 235 pence per share, valuing the company at about £543 million and implying sizable premiums to prior reference prices.

Those moves underline the late-December setup: light volumes, headline-driven gaps, and an outsized role for a few large sectors, including defense, banks, and energy, in determining index direction.

What comes next: the January meeting and procurement reality checks

The base case for markets is continued volatility in European defense stocks as investors map geopolitics onto order expectations. If talks move from broad statements to implementable milestones, such as a monitored ceasefire framework and a defined guarantee package, the de-escalation premium can build and keep pressure on the sector’s strongest performers.

An upside scenario for the sector, despite peace progress, would come from budget decisions that lock in elevated procurement through 2026, plus clarity that replenishment and modernization programs will proceed on existing schedules. A downside scenario would be faster-than-expected political pivoting in Europe toward fiscal restraint that slows incremental defense orders, even if existing backlogs remain intact.