Ukraine war drives Europe defense spending

The message matters economically because it points to a longer stretch of elevated defense budgets across Europe, sustained missile and drone demand for Ukraine, and heavier pressure on the region’s weapons factories. Kyiv said it is contracting for roughly 1,000 Patriot missiles with allied help and European Union financing, while also facing a roughly $27 billion gap for drone programs that have become central to its battlefield strategy.

That spending is already feeding through to defense markets. The iShares U.S. Aerospace & Defense ETF, ITA, fell to $218.32 on Thursday after recently trading as high as $242.79 in June, leaving it well below its 50-day moving average of $238.78 and 200-day average of $229.56. The more specialized SPDR S&P Aerospace & Defense ETF, XAR, was at $244.66, also below both its 50-day and 200-day averages, as investors weighed whether the war-driven procurement wave is being offset by stretched valuations and broader risk aversion.

For investors, the signal is that the Ukraine trade is shifting from a short-cycle surge story to a multiyear budget and production cycle. That is constructive for contractors with missile, air defense and munitions exposure, but it also raises execution risk for suppliers that have to scale output fast enough to meet government orders.

Markets are also reading the geopolitical backdrop as supportive of safer assets. U.S. crude oil traded near $97.34 a barrel, reflecting persistent war-related energy risk, while Adalytica’s trade signals showed extreme fear in the S&P 500 and extreme greed in Treasuries, a combination that suggests investors are favoring defense and duration over broad risk assets.

Colby also said a Pentagon review due in the next two months could alter U.S. basing in Europe, aligning with the administration’s push to shift more responsibility to NATO allies while preserving U.S. flexibility for Asia. For defense investors, that means the next catalyst is not a peace deal but the size, timing and geography of follow-on orders — and whether Europe can finally turn pledges into production.