Germany halts warship project; Rheinmetall falls 13%

Defense stocks across Europe dropped Wednesday after a report that Germany will scrap a multi-billion-euro plan to build six warships, a move that rattled investors who had bet on sustained government spending for the sector.

Berlin is set to abandon the F126 frigate program, the Financial Times reported, citing two people familiar with the matter. The deal would have been the German navy's biggest ship commission since World War Two.

The news hit German-listed defense names hardest. Rheinmetall, a munitions maker that has been a major recipient of government contracts, fell as much as 13% in morning trading in Frankfurt. Hensoldt and Renk gave up 5% and 3.8%, respectively.

Shares of other European contractors also moved lower. Sweden's Saab dropped 3.1%, Italy's Leonardo fell 3.7%, and London-listed BAE Systems lost 1.6%.

The abrupt cancellation suggests the expected ramp in European defense outlays may not be uniform or predictable. Traders had been pricing in follow-through orders after Germany announced a €100 billion military modernization fund in 2022; the frigate reversal raises questions about which programs will actually get funded. The sector had rallied sharply over the past year, making it vulnerable to any sign of government hesitation.

For a broader take on how government spending shifts affect equity positioning, see AlphaScala's stock market analysis.

Rheinmetall was down 13% by mid-morning in Frankfurt, the worst performer on the German DAX index.