Defense stocks soar due to US and Iranian attacks

Global defense stocks soared on Monday as investors reacted to last weekend’s dramatic military escalation in the Middle East.

The sector was a rare bright spot amid broader market declines triggered by concerns about escalating regional conflicts.

german Hensoldt and the British BAE Systems were among the top performers on the Stoxx 600, both up about 4%. Defensive name Thales, Lenkand leonardo While the rise was between 4% and 1%, slowing the pace of increase to date, the broader Stoxx600 index The stock fell more than 1% to its lowest level in two weeks.

Mainland America, US companies lockheed martin and Northrop Grumman Each rose more than 5% in premarket trading. futures tracking S&P500 fell 1.1%.

Regional activity in the Asia-Pacific defense sector slowed slightly as the South Korean market was closed on Monday. Japanese defense giants Mitsubishi Heavy Industries and IHI each rose about 3%, while Singapore’s ST Engineering rose 2.8%.

The move comes after the United States and Israel launched a wide-ranging offensive against Iran over the weekend, killing Iranian Supreme Leader Ayatollah Khamenei and ending his 36-year rule. Three U.S. service members were killed in Iran’s retaliatory attack on a U.S. military base in the Middle East.

The prospect of an escalation also sent oil prices and energy company stock prices soaring.

“Uncertainty is exactly what investors are dealing with right now,” said Patrick O’Donnell, chief investment strategist at Omnis Investments.

“There’s a little bit more uncertainty in the stock market about how long this situation is going to last because the longer this goes on, the more it could impact both growth and inflation,” O’Donnell told CNBC’s “Squawk Box Europe” on Monday.

“Really, the question is… how long will this conflict last?”

The conflict with Iran entered its third day on Monday, with US President Donald Trump warning of further American casualties and saying the conflict could last up to four weeks.

Last June, the United States and Israel launched airstrikes that damaged three Iranian nuclear facilities.

Karl Bildt, a former Swedish prime minister and co-chair of the ECFR board, said it was expected that Iran would strike back against US military facilities in the Gulf, “but now it appears that it is attacking other targets across the Gulf as well.”

“This is surprising, but also very worrying, because stability in the Gulf is important to all of us, to the global economy and certainly to the region,” he said.

European defense companies are nearing the end of their quarterly earnings season, and analysts at Barclays said that despite strong share prices, “there have been more negatives than positives so far this year.”

Sweden’s Saab posted record results and a backlog of orders, but analysts at Barclays said in a note to clients on Monday that they “question the sustainability of its high growth.” Saab shares rose as much as 7% early Monday, then quickly pared back their gains and were trading roughly flat by midday London time (7 a.m. ET).

“Valuations are also significantly overvalued and do not justify the long-term earnings trajectory, which could normalize sooner than most peers,” they added.

Rheinmetall and Thales have not yet reported full-year profits.

—CNBC’s Lim Hui Jie and Lee Ying Shan contributed to this report