Meanwhile, European defense stocks saw the biggest drops on a market-wide hope that a ceasefire in Ukraine was once again within reach. As of Wednesday morning, the Stoxx Europe Aerospace and Defense index was down 0.9%. This drop continued the precipitous decline of 2.6% a day’s trading earlier on Tuesday. Rheinmetall, often credited as the third most powerful force in the defense sector, suffered a crushing drop. The company’s stock then crashed 4.85%, the heaviest faller among all German DAX constituents.
Though Rheinmetall now is facing hard times, the company had earlier risen above the recent downturns to become the biggest winner of the defense industry in 2025. The shocking difference in performance underscores both the volatility and unpredictability that swathes the defense industry during rapidly changing geopolitical tensions.
In early trading Wednesday, Rheinmetall was down another 1.8% in share price. Other significant losses within the sector included Hensoldt, which dropped 1.9% and Rolls-Royce, which lost 1.9%. Qinetiq suffered a similar fate, with its share price falling 2%.
Some market analysts have attributed the sudden adverse swing to speculation over an impending diplomatic breakthrough in Ukraine. This hawkishness has led to dramatic turns in investor sentiment against European assets. Jim Reid, an analyst at Deutsche Bank, noticed that these events sparked “some rather big market reactions.” Perhaps most crucially, they targeted industries most directly related to the still-lingering invasion.
“Indeed, it was notable that defence stocks really struggled yesterday, and Rheinmetall (-4.85%) posted the worst performance in the German DAX (+0.45%) yesterday, despite being the strongest performer over 2025 as a whole given the wider ramp up in defence spending.” – Jim Reid, Deutsche Bank
The larger economic context, including macro financial conditions, the interest rate environment, and inflation certainly informed market behavior too. Yesterday, the U.K. surprised on the upside with its inflation numbers. That hasn’t stopped the inflationary pressures, which recently spiked again to 3.8% for the year ending in July. This surprise jump in inflation initially sent the British pound skyrocketing against the U.S. dollar. It subsequently retracted those gains and moved sideways.
Sanjay Raja, the chief U.K. economist at Deutsche Bank, told us what’s driving the surprise inflation. He noted that postponements in data compilation by the United Kingdom’s Office for National Statistics only heightened this surprise. In this regard, he forecast that CPI levels might sustainably get back on target as late as 2027.
“Prices for airfares and sea-fares tend to be more volatile later in July as demand picks up.” – Sanjay Raja, chief U.K. economist at Deutsche Bank
Adding to the market’s cautious tone, S&P 500 futures remained nearly flat overnight as investors awaited the release of the Federal Reserve’s July meeting minutes. Market participants are theavedlyontholicul provided signals ceconomy. Their excitement at their potential indicates that these signals might help create the conditions for a better economy to come.