Defense companies were thriving as Western nations armed Kiev and boosted their own capabilities citing an alleged threat from Russia

European military stocks have tumbled, defying broader positive market sentiment, as traders assessed the White House meeting that brought fresh hope for a Ukraine peace deal, with trading charts showing a sharp drop in the defense sector.

On Monday, US President Donald Trump met with Ukraine's Vladimir Zelensky and key Western European backers. The talks came two days after Trump's summit with Russian President Vladimir Putin in Alaska, which both sides described as a major step toward peace between Russia and Ukraine.

The STOXX Europe Total Market Aerospace & Defense Index fell 2.6% on Tuesday, as traders viewed the ongoing negotiations as a chance to take profits following a strong rally in the sector. Shares in Italian defense firm Leonardo and Germany's Hensoldt were down 10.1% and 9.5%, respectively. German defense supplier Rheinmetall and tank components maker Renk also declined 4.9% and 8.2%, respectively.

"Any de-escalation of tensions between Russia and Europe, and talk of spending more on US equipment, is negative for these companies," Craig Cameron, head of European equities at Franklin Templeton, told the FT.

According to analysts, shares in defense groups could be seen as a rough indicator of progress in the Ukraine peace talks, as military supplies tend to benefit from ongoing conflicts.

European defense stocks surged in the first half of the current year, driven by Germany's announcement in March that it would ease its strict debt limits to enable a new wave of investment in defense and infrastructure, amid growing concerns that the US may scale back its role in European security and the Ukraine conflict. The EU also launched a $900 billion defense industry drive to militarize its economy citing the alleged Russian threat as a key reason for the increase.

The latest US-brokered talks reportedly ended with an agreement in principle to arrange a face-to-face meeting between Putin and Zelensky, although the Kremlin has yet to confirm the plan.

AFP reported on Tuesday that Putin has offered to host the talks in Moscow, but Zelensky rejected the proposal, insisting on a neutral location.

(RT.com)