Defense stocks across Europe are crashing again, this time side by side with the fastest unwinding of gas long positions since winter 2023, with arms manufacturers and energy bulls both getting hit.
The sell-off comes after markets briefly rallied Tuesday on the back of talks held in Washington between U.S. President Donald Trump, Ukrainian President Volodymyr Zelenskyy, and senior European officials, according to CNBC.
By 8:20 a.m. in London, the Stoxx 600 index was already down 0.3%, with every major European sector in the red. This followed Tuesday’s green session, when markets initially responded positively to the outcome of Trump’s White House meeting with Zelenskyy and a bloc of European leaders.
But that enthusiasm didn’t carry into Wednesday, especially for the defense sector, which was already losing ground the day before. The Stoxx Europe Aerospace and Defense index shed another 0.9% in early trading, after already dropping 2.6% during Tuesday’s session.
Germany’s Rheinmetall fell 1.8%, and Hensoldt was down 1.9%. In the UK, Rolls-Royce lost 1.9%, while Qinetiq dropped 2%. These names were among the weakest in the index, despite the fact that Rheinmetall had been one of the top performers in the DAX earlier in the year.
Diplomacy triggers retreat from defense names
“Speculation about a diplomatic breakthrough meant that European assets saw some sizeable moves [on Tuesday], particularly those most affected by the conflict,” said Jim Reid, a strategist at Deutsche Bank, in a Wednesday morning note.
The weakness in defense came as markets digested hotter-than-expected U.K. inflation data, which showed consumer prices rising 3.8% in the year to July. The print initially pushed the British pound higher against the U.S. dollar, before it erased gains and settled flat.
Long positions on European gas futures were also getting wiped out. In the last five weeks, net-long bets on Dutch gas futures dropped over 50%, the steepest five-week decline since February, just as storage across the region filled up fast ahead of winter, easing supply fears that spiked earlier in the stockpiling season.
Gas futures and inflation fears collide with debt pressure
Last week, gas futures fell to their lowest in over a year. Still, European gas prices are trading above pre-crisis levels from before the Russia-Ukraine war that began three years ago. At the start of the stockpiling season, traders were worried.
Storage was low, and new geopolitical tensions, including a surge in fighting in Ukraine and conflicts in the Middle East, kept prices elevated. But now, the sentiment has flipped. Funds are pulling out, storage is strong, and prices are falling.
This energy unwind is happening alongside deeper issues in global debt markets. Investors are warning that the world has entered a phase of “fiscal dominance,” where central banks face mounting pressure to keep interest rates low, not to manage inflation, but to help governments manage their exploding debt burdens.
That pressure is loudest in the United States, where Trump is calling on the Federal Reserve to cut rates in order to reduce interest payments on the national debt. Central banks in Japan, the UK, and across Europe are also being squeezed.
In America, the gap between two-year and 30-year Treasury yields has widened to levels not seen since early 2022. Short-term yields are falling on expectations of rate cuts, while long-term yields remain high, driven by market concerns about inflation and future debt loads.
In the UK, the picture is even worse. 30-year gilts are now yielding 5.6%, the highest in over 25 years. By comparison, 30-year U.S. Treasuries are around 4.9%. The spike reflects how tight things have gotten. Government borrowing continues, but the cost of carrying that debt is putting both central banks and financial markets under serious pressure.
