DE40: Defense stocks Rheinmetall and Hensoldt lead Germany session

• DE40 traded flat in Monday's session; arms sector performs well
• Rheinmetall (RHM.DE) shares gain ahead of scheduled speech by German Defense Minister Pistorius (5:00 pm)
• Shares of arms company Hensoldt (HAG.DE) follow the trend and gain 6.3%
• BASF (BAS.DE) loses 0.5% despite a positive rating from analysts at Stifel

Sentiment is mostly weaker in the European session, after the Nasdaq100 lost more than 0.3% on Friday, and the Asian session suggested profit-taking on Chinese indices, in a week in which the market is facing the publication of PMI indices from the Middle Kingdom. The DAX index is still doing noticeably better today, against the UK's FTSE and France's CAC40. Positive sentiment in Germany today is clearly centered on the stocks of companies in the arms sector, which is gaining on the wave of defense spending-oriented conferences sweeping Europe and the US.

Defense stocks appear to be helped by the prospect of a possible election victory for Donald Trump, who has already announced that America will expect more initiative and real investment in the military from Europe. However, the prevalence of the Russian army on the frontline in Ukraine indicates that spending will be necessary 'anyway,' and Germany, as a major industrial base, may lead the way in equipment and munitions production.

DE40 chart (M15)

Looking at the DAX index futures, we see that the bulls have encountered resistance near 17,500 points several times, and it seems that this zone will serve as an important level limiting the upside in the near term. It's overcoming could open the way for the bulls even to the vicinity of 18,000 points, with Wall Street sentiment remaining the key benchmark. On the other hand, the contracts could still realize a 1:1 correction scenario, and in that case, the nearest support level could be sought at 17,250 points, where we see previous price reactions (the local peak from mid-February) and the 23.6 Fibonacci retracement of the upward wave from early January 2024.

Source: xStation5

The most active DAX index stocks today are Rheinmetall and Frasenius. SAP and Heidelberg Materials are also doing well. On the other side, we see weakness in shares of Continental, Zalando, Sartorius and Volkswagen. Source: Bloomberg Finance LP

German defense sector arise

• Rheinmetall shares are among the strongest performers in Europe both today and this year. They have risen nearly 45% since January 1. The market is letting play out the scenario of additional revenue streams from capacity enhancements in munitions production, which, as the frontline in Ukraine shows, remains crucial to resolving the conflict and could help Ukraine hold off a Russian offensive.
• Today, ahead of a speech by German Minister Boris Pistorius, scheduled for 5:00 pm, the shares are gaining 3% driven by expectations around a major shift in arms spending and production of munitions, for which the company has yet to receive orders and start production, although its CEO, Armin Papperger, has repeatedly signaled that it is capable of starting it at any time and on a large scale.
• In addition to Rheinmetall, we are also seeing a rally in the shares of Hensoldt, a company that supplies radar, aerospace parts and technology, and optoelectronics. In addition to a speech by Minister Pistorius, where news of strengthening munitions production in Germany may fall, President Macron is holding a conference in Paris today, oriented toward military aid to Ukraine.

Analysts' recommendations change

• Analysts at Stifel raised their recommendation to 'Buy' on BASF (BAS.DE), target price EUR 59.
• Barclays lowered its recommendation for Lufthansa (LHA.DE) to 'Neutral', target price EUR 8.5
• Warburg Research raised its medium-term expectations and target price for Hensoldt (HAG.DE), to EUR 39.5 per share

Hensoldt shares (D1 interval)

Source: xStation5

Looking at Rheinmetall's multiple metrics, we see that the forward PE ratio is significantly lower than the actual PE measure, indicating that the market, despite recent euphoric increases, may be underestimating the prospect of the company's surging earnings. The biggest upward catalyst appears to be the prospect of large-scale munitions production, which the CEO believes the company can achieve if it receives orders.

Source: XTB Research, Bloomberg Finance LP