Defense Stocks Take Center Stage as DAX Retreats on Geopolitical Shifts

Germany’s leading stock index retreated Thursday morning as defense stocks came under significant pressure amid expectations of progress in Ukraine peace negotiations and potential U.S.-Iran talks. The DAX, which briefly dipped to 24,434.99, recovered somewhat to close the mid-morning session at 24,543.86, representing a loss of 108.91 points or 0.44%. The pullback reflected a broader market rotation away from defense-related equities as investors repositioned ahead of the European Central Bank’s monetary policy announcement scheduled for later that day.

Defense Sector Weakness Leads Market Decline

The weakness in defense stocks was particularly pronounced, with Rheinmetall plummeting 8%, signaling investor caution about the sector’s near-term outlook. Other major defense plays also registered substantial losses, including Renk, which fell 2.7%, and Hendsoldt, down approximately 2.5%. Beyond defense stocks, the broader market felt additional pressure from losses in automotive names, including Volkswagen, BMW, and Mercedes Benz, all declining between 2% and 3%. Continental also shed gains in this range, while industrial and energy stocks like RWE, E.ON, and Siemens Energy followed suit. Utilities and financial services experienced similar headwinds, with names like Porsche Automobil Holding, BASF, Siemens Healthineers, Deutsche Post, and Allianz posting moderate declines.

Bright Spots Emerge Amid Broader Selloff

Not all segments retreated. SAP emerged as a notable winner, climbing 3.25%, while Deutsche Bank managed a 2.75% advance. Technology and materials sectors showed relative resilience, with Zalando, GEA Group, Heidelberg Materials, and Siemens advancing between 0.6% and 1%.

Economic Data Sends Mixed Signals

Germany’s economic backdrop remained mixed. Factory orders posted an impressive rebound in December, advancing 7.8% month-over-month—the strongest performance in two years and confounding analyst expectations for a 1.8% contraction. The statistical office revised November’s expansion to 5.7% from an initially reported 5.6%. However, construction activity painted a different picture, returning to contraction in January after expanding in December for the first time in nearly four years. The HCOB construction Purchasing Managers’ index fell to 44.7 in January from 50.3 the previous month, with readings below 50.0 indicating sector contraction. This marked the sector’s fastest rate of decline in three months.

Where Defense Stocks Go From Here

The pressure on defense stocks reflects broader market dynamics shaped by geopolitical developments and economic crosscurrents. While factory orders suggest underlying manufacturing strength, construction weakness tempers optimism. Investors monitoring defense stocks should watch both the ECB’s policy moves and evolving developments in international relations closely, as these factors will likely continue to drive sector rotation and individual stock performance in the coming sessions.