Europe's defence stocks pull back after gravity-defying rally

(Reuters) - European defence company shares retreated on Tuesday, surrendering earlier gains, after record run up on Monday, when stocks were buoyed by the prospect of higher defence spending in the region.

The entire sector rose sharply on Monday after the clearest sign yet Europe's leaders were racing to boost spending and help secure peace in Ukraine, and extended those gains as U.S. President Donald Trump paused military aid to Ukraine.

By mid-afternoon trade defence shares had reversed course, with an index of aerospace and defence companies down 1.3% as investors cashed in on the record-breaking two-day rally.

"I think it is reasonable for the shares to stabilise after yesterday's rally, and I see it as a strong indicator that the sell-off is not extensive," Tom Guinchard from Pareto Securities said.

"We are facing a new reality in terms of defence ramp-up with accelerated spending supported by the European Commission," he added referring to proposal on new joint borrowing to boost Europe's defence capabilities.

The defence sector has more than doubled in value since Russia invaded Ukraine in February 2022.

The sectoral index closed 7.7% higher on Monday, logging its biggest one-day jump since November 2020.

Europe's biggest defence company by market value, BAE Systems, was down 2.9% at 1507 GMT, after rising as much as 3.4% earlier and following a 14.6% jump on Monday.

Germany's Hensoldt was still up 4%, though pared earlier gains after soaring nearly 19% at one point earlier and a 22% jump on Monday. Rheinmetall and Renk were down 1.6% and 0.5%, respectively.

France's Dassault Aviation and Sweden's Saab both retreated by 0.6%.

Europe's largest defence electronics firm Thales was up 2.7% after earnings beat.

($1 = 0.9485 euros)

(Reporting by Isabel Demetz, Anna Pruchnicka, Ozan Ergenay in Gdansk; Editing by Amanda Cooper)

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