Geopolitics Causes European Stocks to Fluctuate

A ceasefire between Iran and Israel, quickly followed by the NATO world leaders summit, left EU stocks pulling in different directions as traders try to figure out the fallout.

The Good and the Bad on Defence

The conflict in the , with uneven results on either side of the Atlantic. The involvement of the US in the war led to a rise in American military-related stocks, while those of European companies were on the back foot, as a conflict in which US arms manufacturers have a larger presence dominated the headlines. However, the swift end of the war and the subsequent NATO meeting appear to have resolved that situation somewhat in favour of Europe. Deutsche Bank warned on Monday that European countries have long been underinvesting in defence.

The pledge by NATO leaders to (up from the previous target of 2.0%) plus an additional 1.5% for infrastructure last Thursday was followed by a rise in the market. However, major military firms such as Rheinmetall and Fincantieri disclosed large orders on the same day, among the best-performing stocks in Europe. Still, analysts cautioned that the spending (and stock gains) might not be even across the continent, given differing views on national security priorities. European countries in the north and east are more concerned about Russia and are likely to be more enthusiastic about meeting the targets than countries to the south and west.

Controversy and Trade Problems

pledge, which will allow spending of up to just 2.1% in aggregate instead of the 5.0% for other countries. US President Donald Trump threatened tariffs on Spain to get the government to "pay it back to us on trade", though it wasn't clear how that would work as Spain's trade policy is negotiated as part of the EU bloc of nations. The President of the EU Council, Antonio Costa, put a positive spin on the spending agreement in the context of the trade negotiations between his bloc and the US, which are coming down to the wire with the 90-day moratorium on 50% tariffs expiring next week. He argued that the with the US, which is the leading cause of friction with the Trump Administration.

The next event from Europe that traders are likely to watch closely is Tuesday's flash Eurozone CPI, which is expected to rise to 2.0% from 1.9%. But the core rate is projected to stay unchanged at 2.3%. The German DAX was among the better-performing indices last week after breaking back above the 24000 level. The index has scored around 15% of gains so far this year, primarily driven by Rheinmetall's 188% gain during the same period, and could be impacted by European data.

DAX Shy of Records But in Range

Following the “Liberation Day” crash down to 18800, Germany’s premier index is up nearly 30% at 24100. However, hitting a new all–time high at 24500 in early June has caused a pullback, which formed support at 23000. The flatness of the 20-day VWAP, especially on the lower end at 22865, suggests a potential range might be playing out, with the 24321 level acting as short-term resistance, potentially. If prices remain above the autotrend high at 23834 or its subsequent low at 23476 for longer than expected, DAX might break towards the 25000 handle as the RSI shows a little more room to the upside. However, losing the autotrend lows while the VWAP support holds could keep the index in balance until a squeeze eventually leads to a breakout.

Source: SpreadEX | Germany 40

Key Takeaways

The ceasefire between Iran and Israel, immediately followed by the NATO summit, caused fluctuations in European stocks, with defence stocks initially mixed as American military companies benefited from the conflict. Controversy also arose as Spain secured an exception to the NATO pledge. However, the increase of defence spending to 3.5% of GDP, along with large orders for major military firms like Rheinmetall and Fincantieri, boosted European defence stocks. The German DAX index performed well last week, driven by gains in Rheinmetall and other defence stocks. While the index is trading near record highs, traders are closely watching Tuesday’s inflation data in Europe.