Defense Stocks Under Pressure as DAX Retreats on Peace Talk Optimism

German equity markets turned choppy Thursday as defense stocks led the benchmark DAX lower, weighed down by growing optimism around Ukraine peace negotiations and anticipated positive developments in U.S.-Iran discussions. The index, which briefly dipped to 24,434.99, recouped losses to finish around 24,543.86—down 0.44% as investors absorbed a fresh batch of corporate earnings and regional economic indicators while awaiting the European Central Bank’s policy decision later in the day.

The most pronounced casualties were defense-related names, reflecting the market’s risk-on sentiment. Rheinmetall plummeted 8%, while Renk declined 2.7% and Hendsoldt shed approximately 2.5%. The weakness extended to traditional industrial and automotive names, with Volkswagen, Continental, BMW and Mercedes Benz all registering 2-3% losses. Utilities RWE and E.ON, along with Siemens Energy and Porsche Automobil Holding, similarly retreated. Telecom-focused Deutsche Post and financials including Allianz and Deutsche Bank posted modest declines, though BASF, Siemens Healthineers, Daimler Truck Holding, Fresenius and Bayer also surrendered ground.

Tech Stocks Rally While Defense Sector Struggles

Divergence marked the session as software giant SAP climbed 3.25%, bucking the broader weakness. Deutsche Bank rallied 2.75%, while consumer-focused names Zalando and materials plays GEA Group and Heidelberg Materials advanced 0.6-1%. The strength in cyclical and tech-oriented names contrasted sharply with the selloff in defense stocks, highlighting a clear market preference for economically-sensitive sectors over geopolitically-correlated trades.

Economic Data Paints Mixed Picture for Germany

Germany’s manufacturing sector delivered encouraging news, with factory orders surging 7.8% month-on-month in December—the strongest growth in two years and well ahead of economist expectations for a 1.8% decline. Destatis revised November’s figure upward to 5.7% from 5.6%, suggesting sustained momentum in large-scale orders. However, the construction sector painted a bleaker picture. The HCOB construction Purchasing Managers’ Index fell to 44.7 in January from December’s 50.3, indicating contraction and marking the fastest pace of decline in three months. The reading underscores divergence within Germany’s industrial economy, with manufacturing strength failing to lift the broader construction sector as activity retreated for the first time since September.

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