European arms makers retreat as Ukraine peace plan gains traction

(Reuters) -European defence shares fell to their lowest since early September on Friday, as reports about a U.S.-backed deal to end the war in Ukraine pushed traders out of one of the region's best-performing sectors this year. Washington has presented Kyiv with a 28-point plan that would endorse many of Russia's main demands. Ukrainian President Volodymyr Zelenskiy said he was ready for "honest" work on the plan, though his top security official denied on Friday he had agreed to its outline. An index of aerospace and defence companies was down 2.4% at 1123 GMT after falling as much as 3.9% earlier. It underperformed the Europe-wide STOXX 600 index, which was down 0.6%. While off a recent peak in October, the index is still up more than 200% since Russia invaded Ukraine in February 2022. "Even if Europe feels blindsided, (U.S. President Donald) Trump and (Russian President Vladimir) Putin will not care. It could be that the peace plan will actually succeed," said a Frankfurt-based trader. Gerry Fowler, head of European equity strategy at UBS, said European defence stocks were "the most expensive and crowded part of the market", meaning that swings either way reflected trading around market noise rather than any change in fundamentals. PROSPECT OF HIGHER DEFENCE SPENDING Shares in Germany's Renk fell around 8%. Hensoldt, which provides sensor systems for the Eurofighter and Leopard 2 tank-maker Rheinmetall were down between around 5% and 6%. A spokesperson for Hensoldt said the current share price development reflected how closely markets tracked developments around Russia's war on Ukraine. "I consider this to be a dangerous misinterpretation because even if the fighting in Ukraine comes to an end, it does not mean that Europe is safe and no longer needs to invest in defence. If Russia's war against Ukraine ends, it means that Russia will have time and resources to seek out other targets," the spokesperson added. Rheinmetall declined to comment. Italy's Leonardo and Sweden's Saab slipped between around 3% and 4%. Warship builder TKMS also fell around 4%, while Spain's Indra was down some 5%. Defence stocks have helped to push the STOXX 600 index 10% higher this year, hitting successive record highs on the back of the prospect of a swell of government spending on regional security. JPMorgan analysts wrote in a note earlier this week that they saw the latest peace plan as not acceptable to Ukraine or its European allies, and viewed the recent sell-off in defence companies as a "compelling entry point" into the sector. "If the U.S. is able to impose this plan (which is unlikely, in our view) we think it would amount to a de facto victory for Russia, driving European defence spending even higher than planned and at a much faster pace," they wrote. (Reporting by Anna Pruchnicka in Gdansk, addditional reporting by Daniela Pegna in Frankfurt, Lucy Raitano in London, Maria Rugamer in Gdansk, Matthias Inveradi, editing by Alun John, Dhara Ranasinghe and Alex Richardson)

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