The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, August 1, 2025. REUTERS/Wolfgfang Rattay/File Photo

By Naomi Rovnick and Dhara Ranasinghe

LONDON (Reuters) -Defence stocks and energy markets are likely to be in focus this week, as European leaders rushed to back Ukraine in talks with U.S. President Donald Trump that may pressure Kyiv to accept a peace deal favouring Russia.

Investors are watching for signs that the U.S. may move closer to Russia in a bid to exploit vast, untapped Arctic energy resources, in a major geopolitical shift that piles pressure on Europe to rapidly boost defence spending.

Trump and Russian President Vladimir Putin ended their weekend summit in Alaska without securing a Ukraine ceasefire agreement, with the U.S. President then saying he now wanted a rapid peace deal that Kyiv should accept.

Ukrainian President Volodymyr Zelenskiy is travelling to Washington on Monday for talks that leaders of nations including Germany, the UK and France will now join.

"Trump seems inclined to reduce or even end US support for Ukraine. Putin got him interested in business deals," Berenberg Chief Economist Holger Schmieding said in a note to clients.

"As a result, the US may lift its sanctions on Russia and invest in Russia instead," he added.

"Europe will have to spend a lot more for its own defence."

DEFENCE STOCK RALLY

Investors have bet on that outcome since February 2022, driving a supercharged rally in European aerospace and defence stocks with gains of over 600% for Leonardo and 1,500% for Germany's Rheinmetall.

The euro has rallied 13% against the dollar this year and traded at about $1.17 on Friday.

Bank of America strategist Michael Hartnett highlighted the potential for U.S.-Russia Arctic drilling projects to exploit 15% of the world's undiscovered oil and 30% of the world's undiscovered natural gas, resulting in a deep energy bear market.

Brent crude, which dropped more than 1% to near $66 a barrel, on Friday, was still priced for a Ukraine peace deal, Hartnett cautioned, while Trump wanted lower energy prices for U.S. consumers.

Ukraine's government bonds - key mood indicators - rallied when news of the summit emerged earlier this month but have stalled at a still-distressed 55 cents per dollar.

"I would think they will be a bit weaker following the recent strength as the mood seems to favour Russia following Friday's summit," Aegon Asset Management head of emerging market debt Jeff Grills said.

(Reporting by Naomi Rovnick and Dhara Ranasinghe ; additional reporting by Samuel Indyk, Marc Jones and Alun John in London; editing by Sharon Singleton)