Synopsis: FTSE 100 slides as UK defence stocks tumble on Ukraine peace optimism during thin holiday trading, while mining gains offset sector losses.
London’s stock market opened the final trading week of 2025 on a cautious note. The FTSE 100 edged lower as fresh optimism about a possible Ukraine ceasefire dampened investor appetite for defence stocks. Trading volumes remained exceptionally thin following the Christmas break.
The blue-chip index slipped to 9,874.96 points by mid-morning on Monday. This modest decline followed U.S. President Donald Trump’s suggestion of significant progress in peace negotiations with Ukrainian President Volodymyr Zelenskiy. The announcement triggered an immediate selloff across UK and European defence companies.
Defence Stocks Lead Market Decline
Major British defence contractors bore the brunt of Monday’s losses. Babcock International dropped 3%, marking the sharpest decline among FTSE 100 defence firms. Chemring Group shed 1.5% as investors reassessed the sector’s outlook. BAE Systems fell 1.3%, while Rolls-Royce declined 1.1% during the session.
The broader FTSE aerospace and defence index slipped 1.2%. This selloff reflected growing concerns that reduced geopolitical tensions could curb military spending. Defence stocks have surged 65% year-to-date in 2025, driven primarily by heightened conflict risks. However, peace prospects now threaten to reverse some of these gains.
Trump stated on Sunday that negotiators were “getting a lot closer, maybe very close” to an agreement. Zelenskiy echoed this optimism, revealing that a 20-point peace plan was “90% agreed” upon. Full security guarantees for Ukraine reportedly stand at “100%” completion.
Mining Sector Provides Support
Meanwhile, industrial metal miners offered a bright spot amid the subdued trading environment. The mining sector gained 0.9% as copper prices hit record highs. Last week’s sharp rally in Shanghai markets spilled over into global commodity trading.
The pound dollar rate remained relatively stable throughout the session. Currency markets showed limited volatility as traders awaited further clarity on the Ukraine situation. Sterling held steady against major currencies despite the FTSE 100’s modest retreat.
International Personal Finance emerged as the standout performer of the day. The British lender surged 5.4% after announcing a £543 million takeover deal. BasePoint Capital agreed to acquire the company for approximately $732.5 million.
Basic resource stocks also contributed positive momentum to the broader market. These gains helped offset pressure from declining defence shares. The domestically focused FTSE 250 index edged up 0.1%, outperforming its large-cap counterpart.
Holiday Trading Shapes Market Activity
Trading volumes remained exceptionally low throughout Monday’s session. Many investors stayed on the sidelines during the “Twixmas” period , which fallsbetween Christmas and New Year. UK markets are scheduled to close early on Wednesday, December 31.
Furthermore, exchanges will remain shut on Thursday for New Year celebrations. This holiday-shortened week typically sees reduced liquidity and muted price movements. The thin trading environment amplified the impact of the defence sector selloff.
Despite Monday’s dip, the FTSE 100 remains on track for impressive annual gains. The index has surged 21.81% year-to-date through late December. This performance outpaces the pan-European STOXX 600’s 16.7% rise and the S&P 500’s 17.8% advance.
The London benchmark is heading toward its fifth consecutive annual gain. Defence stocks, miners, and banks have emerged as key drivers behind this remarkable run. Geopolitical tensions throughout 2025 fueled sustained rallies in these sectors.
Peace Talks Create Uncertainty
However, the path to peace remains uncertain despite recent optimism. Russian President Vladimir Putin has rejected ceasefire proposals without territorial concessions from Ukraine. Control of the Donbas region and other contested areas remains unresolved.
Trump later claimed negotiations had reached “95% of the way” toward a final deal. U.S. and Ukrainian teams are scheduled to meet again next week. Zelenskiy indicated openness to holding a referendum on any agreement.
Analysts suggest that Europe’s defense spending trend may prove “irreversible” despite progress toward peace. Long-term geopolitical concerns could sustain demand for military equipment. Potential tariffs and supply chain disruptions under the new U.S. administration add complexity to the situation.
European defence shares mirrored UK losses on Monday. Italy’s Leonardo dropped 4%, while Germany’s Rheinmetall fell 2.6%. This regional selloff highlighted widespread reassessment of defence sector valuations.
Investors now face a delicate balancing act as they head into 2026. Successful peace negotiations ease global risk premiums and benefit consumer stocks. Conversely, failed talks might trigger renewed defence sector strength.
The FTSE 100’s resilience throughout 2025 demonstrates its ability to navigate complex market conditions. Nevertheless, geopolitical developments are likely to shape trading patterns in the early part of 2026. Market participants are closely monitoring upcoming economic data releases and Ukraine negotiations.
