Europe defence shares set for biggest daily drop since April 2020

(Reuters) -European defence company shares plunged on Monday, surrendering some of their year-to-date gains, as a steep selloff in equities sparked by U.S. President Donald Trump's sweeping tariffs gathered pace, while fears grew of an ensuing global recession.

An index of aerospace and defence companies, which so far this year has been enjoying a record -breaking run, dropped 8.9% at 0903 GMT, following an 8% decline on Friday.

If losses continue, this will mark its biggest one-day decline since early April 2020. The index is still up 18% so far this year, having shown a 30% year-to-date gain a week ago.

"For me, the underperformance of the defence sector is explained by the disproportionate share price gains in the year to date," Stefan Maichl at lender LBBW said.

"The resulting increase in valuation makes the shares vulnerable to corrections. Investors are now putting their high profits in a safe place for the time being," Maichl added.

Tom Guinchard, equity research analyst at Pareto Securities pointed to China's export restriction on rare earth elements, which could have significant impact on delivery schedules in production.

Defence companies had previously ranked among the best performers in Europe in 2025, driven up by the prospect of a swell of government spending on regional security.

German defence companies Rheinmetall, Hensoldt, Renk were down 9% and 10%.

Europe's biggest defence company by market value, BAE Systems was down 4%.

France's Dassault Aviation and Thales dropped between 6% and 9%. Sweden's Saab was down 7%.

Britain's Rolls-Royce, Chemring Group, Babcock International and Qinetiq were all down between 6% and 7%.

(Reporting by Anna Pruchnicka and Ozan Ergenay; Editing by Amanda Cooper)