Defense stocks under pressure; markets await outcome of talks in Moscow 🏛️

Financial markets are clearly in a wait-and-see mode today, awaiting the outcome of talks between US Special Envoy Steven Witkoff and Vladimir Putin, with any rumours of progress in the negotiations quickly translating into movements in the euro, European indices and the industrial and defence sector. Investors are discounting the growing likelihood of even a framework agreement or a lasting ceasefire, treating it as a potential game-changer for risk premiums in Europe.

At the same time, the very fact that the market is increasingly pricing in a more optimistic resolution to the conflict is acting as a brake on the share prices of European defence companies. After months in which the defence sector benefited from record orders and increased security spending, the recent wave of headlines about peace plans has triggered profit-taking and a correction in industry indices, even though there is still no sign of a lasting breakthrough on the battlefield.

What can we expect from today's talks?

Two possible paths can be considered. Firstly, Putin may take a stand against President Donald Trump's peace plan. The immediate market reaction would be the opposite of what we saw last week, i.e. a rebound in the euro, frontline currencies, including the Polish zloty, and growth in the broader European market, with the exception of raw materials, industrial and defence companies. Alternatively, Putin could signal his willingness to negotiate. At first glance, this is positive news, but not necessarily. Putin has an incentive to enter into talks without immediately agreeing to the terms of the agreement. Given that Ukraine has already shown a willingness to enter into talks, Russia has an interest in dragging out the negotiations in order to obtain greater concessions.

Let us also remember that even the 30-day partial ceasefire agreement reached in March was broken almost immediately. Therefore, even a peace agreement agreed upon by all parties may not survive the final test.

Shares in German defence giant Rheinmetall (RHM.DE) are losing ground during today's session and remain below the 200-day exponential moving average (gold curve on the chart). Interestingly, this technical level has not been tested by the market since November 2024. Source: xStation