Global defense stocks jump as U.S., Iran exchange attacks

Global defense stocks jumped early Monday as investors reacted to a dramatic military escalation in the Middle East over the weekend.

The sector was a rare bright spot amid a broader market sell-off triggered by fears of a wider regional conflict.

Germany's Hensoldt and Britain's BAE Systems were among the top performers in the Stoxx 600, both up more than 5%. Defense names Thales, Renk, and Leonardo rose between 3.1% and 4.5%, while the broader Stoxx 600 index fell 1.4%, touching a two-week low. 

Stateside, U.S. firms Lockheed Martin and Northrop Grumman rose 7.7% and 5.2% in premarket trading. Futures tracking the S&P 500 were down 1%.

With South Korean markets closed Monday, regional activity in Asia-Pacific defense sector was somewhat muted. Japan's defense heavyweights Mitsubishi Heavy Industries and IHI rose about 3% each, while Singapore's ST Engineering climbed 2.8%. 

The moves come after U.S. and Israel launched widespread attacks on Iran over the weekend that killed Iranian Supreme Leader Ayatollah Ali Khamenei, ending his 36-year rule. Retaliatory strikes by Iran against U.S. bases in the Middle East killed three U.S. service members.

Prospects of an escalation also led oil prices and energy companies' shares to surge.

"It's very much one of uncertainty at the moment that investors are grappling with," said Patrick O'Donnell, Chief Investment Strategist at Omnis Investments.

"Equity markets are a little bit more uncertain about just how long this is going to drag on, for the implication for both growth and inflation that it will have the longer that it goes on," O'Donnell told CNBC's "Squawk Box Europe" on Monday.

"Really, it's a question of... what's the duration of this conflict?"

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

Defense stocks have surged in recent years as geopolitical tensions mount

Defense companies have already posted big gains over the past few years amid heightened geopolitical tensions, prompting governments to hike defense spending.

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