European Defence Stocks Hit Record High as Geopolitical Tensions Drive Safe-Haven Flows
STOXX aerospace and defence index surges nearly 2% to all-time high on fifth consecutive day of gains while dollar strengthens as Venezuela strikes and Greenland tensions reshape investor positioning
European defence stocks jumped to a record high on Thursday as rumbling geopolitical tensions from Venezuela to Greenland kept traders focused on military spending trajectories, while oil prices and the dollar both gained ground amid heightened uncertainty over American foreign policy and regional stability. The STOXX Europe aerospace and defence index rose nearly 2% in early trading, marking its fifth consecutive day of gains and capping a 13% surge since the start of 2026—extending a remarkable 260% rally since Russia’s February 2022 invasion of Ukraine.
The gains came as news emerged of the U.S. seizure of two Venezuela-linked oil tankers in the Atlantic, while Secretary of State Marco Rubio prepared to meet Danish leaders next week to discuss Greenland following President Trump’s renewed push to acquire the semi-autonomous territory. The confluence of events underscored how geopolitical risk has moved from sporadic market disruption to a persistent structural feature shaping European equity performance and driving capital allocation toward defence and security sectors.
Defence Rally Extends Multi-Year Surge
The broader pan-European STOXX 600 index declined 0.2% on Thursday as investors digested mixed signals, while Japan’s Nikkei lost 1.6% overnight amid rising tensions with China following Beijing’s dual-use export ban and the launch of an anti-dumping probe into chemicals used in chipmaking. Wall Street futures eased 0.2%, suggesting caution ahead of Friday’s closely watched U.S. non-farm payrolls report that could provide clarity on Federal Reserve rate policy.
Yet defence stocks continued their relentless climb, with Rheinmetall leading Germany’s benchmark index with gains exceeding 7% earlier in the week when the STOXX 600 touched a record 599.65. The defence sector’s 3.3% jump on Monday represented its highest level in nearly three months and highlighted how investors have shifted from viewing military stocks as cyclical trades dependent on specific conflicts to recognizing them as structural growth positions backed by multi-year government spending commitments.
Peter McLean, Head of Multi-Asset Portfolio Solutions at Stonehage Fleming Investment Management, captured the evolving investor sentiment: “What investors are realising is that the threat of geopolitics is not going away. While it is unlikely we see military action in Greenland, there is clearly an impetus to increase defence spending in Europe.” The comment reflects a fundamental reassessment of European security requirements following Russia’s invasion of Ukraine and now amplified by Trump administration signals that unilateral military action remains a viable policy tool.
Dollar Gains Despite Safe-Haven Questions
Currency markets reflected the complex geopolitical landscape, with the euro on track for its eighth straight decline against the dollar despite mixed U.S. economic data on Wednesday. The dollar’s resilience came even as questions mounted about its traditional safe-haven status given the Trump administration’s aggressive foreign policy posture and threats against sovereign territories of NATO allies.
Charu Chanana, chief investment strategist at Saxo, noted that “geopolitical headlines are in the driver’s seat,” pointing to China’s export restrictions to Japan and potential rare earth supply risks. The dollar benefited from flight-to-quality flows even as some analysts questioned whether its safe-haven appeal would endure if Washington continued undermining international institutional frameworks through unilateral actions.
Mohamed El-Erian, former chief executive of bond fund giant PIMCO, warned that Venezuela’s capture would “likely add to the uncertainty of the dollar’s role as a safe haven while raising further questions about deterioration of international institutional pillars.” The tension between the dollar’s technical strength and concerns about U.S. policy predictability represents a new dynamic for currency traders accustomed to viewing American assets as stability anchors during global turmoil.
Oil Markets Navigate Supply Uncertainty
Oil prices recovered Thursday after declining earlier in the week on prospects of higher Venezuelan crude output. Brent futures clawed back above $60 per barrel while U.S. crude rose 0.5% to $56.30, though both benchmarks remained under pressure from sufficient global supplies that allayed immediate concerns about disruptions stemming from the Venezuela situation.
Top U.S. officials said Wednesday the country needs to control Venezuela’s oil sales and revenue indefinitely to stabilize the economy, rebuild the oil sector, and ensure it acts in American interests. Daniel Hynes, ANZ’s senior commodity strategist, suggested “the market’s negative reaction to the Trump comments on controlling Venezuela’s oil looks a little misplaced,” noting that rehabilitating Venezuelan production would require years of political stability and considerable investment.
The European energy index slipped 0.2% on subdued oil prices, with analysts noting that Venezuelan oil supply is unlikely to move global energy markets meaningfully in the near term. Landon Derentz, vice president of energy and infrastructure at Atlantic Council Global Energy Center, emphasized that “even under optimistic assumptions, it will take years to rehabilitate the country’s energy sector.”
Structural Shift Toward Defence Spending
The defence sector’s sustained outperformance reflects more than just tactical positioning around headline risk. European governments have committed to multi-year budget increases that essentially guarantee demand for weapons manufacturers, cybersecurity firms, and military contractors well into the next decade. NATO’s 2% GDP spending requirement has evolved from aspirational target to legal mandate in several countries, with nations bordering Russia or Ukraine moving beyond that threshold.
Fawaz Chaudhry, chief investment officer at Fulcrum Asset Management, characterized Maduro’s overthrow as a “signaling exercise” that will reshape geopolitics. “We’re talking about a world trying to shift to a new era, where we will basically [have] hard power military assets, and go and take control, which basically is a different policy from before.” He expects the more assertive U.S. foreign policy approach will drive “more rearmament of Europe, rearmament of Asia” and predict that defence stocks and military spending will continue rising.
The STOXX Europe Total Market Aerospace & Defence Index gained more than 65% in 2025, according to market data, while order books of Europe’s eight largest defence companies increased 15% in 2024 with combined free cash flows climbing to a record €8 billion. Financial institutions are increasing defence allocations, with the European Investment Bank tripling its intermediated loan and financing guarantee scheme for defence industry suppliers from €1 billion to €3 billion.
Broader Market Context and Forward Outlook
Technology and basic resources also performed well Thursday, rising 2.3% and 2.1% respectively, with miners benefiting from higher copper prices. ASML, the world’s biggest supplier of computer chip-making equipment, rose following Bernstein’s upgrade to “outperform” with a price target increase to €1,300 from €800. Yet these gains were overshadowed by the defence sector’s dominance and the broader narrative of heightened geopolitical risk reshaping market leadership.
Goldman Sachs economists, led by chief European economist Sven Jari Stehn, maintained that “further [interest rate] cuts are possible but would require a clear catalyst at this point, either via a material deterioration in the activity outlook or a more pronounced undershoot of inflation.” The comment suggests that even as geopolitical risk escalates, European central banks are unlikely to ease policy absent clear economic deterioration, potentially supporting defence and other sectors that benefit from steady growth environments.
Marchel Alexandrovich, economist at Saltmarsh Economics, summed up the new reality facing investors: “It is clear that the markets are having to cope with significantly more headline risk than they are accustomed to under the previous U.S. administrations.” For European defence stocks, that heightened risk translates to sustained upward pressure as investors position for a prolonged period of elevated military spending and geopolitical uncertainty.
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