The European stock markets faced significant challenges last week, struggling under the weight of trade tariffs and political turbulence within France. As the impacts of these factors continued to unfold, the performance of European stocks lagged behind that of other major global markets.Mixed results were seen among the three major European indices. The German DAX 30 index managed a weekly rise of 1.57%, while the UK’s FTSE 100 index gained a modest 0.24%. However, the French CAC 40 index slipped by 0.29%, largely due to the ongoing crisis related to the national budget. The variation in performances among these indices can be attributed to a combination of domestic economic policy uncertainty and broader market trends.In the currency markets, the euro experienced a reversal after a troubling three-week decline, appreciating 1.52% against the US dollar. Analysts at HSBC noted that while the euro may stabilize around 1.05 against the dollar by the end of the year, the outlook for 2025 remains pessimistic. They predict that the euro will eventually fall below parity against the US dollar, reflecting ongoing concerns about the economic foundation driving the eurozone.Crucial CPI (Consumer Price Index) data, which is expected to influence the European Central Bank's (ECB) decision regarding interest rate cuts in December, was released last week. After two months of decline, inflation rebounded in November, again surpassing the ECB’s policy target of 2%. Preemptively, the ECB had established a cautious tone prior to the data's release, which diminished immediate volatility in the markets. Nonetheless, market expectations for a rate cut from the ECB later this month appear firmly entrenched.The magnitude of potential rate cuts remains a topic of debate. Many market participants believe that a reduction of 25 basis points is highly likely. However, there are notable dissenters, including dovish ECB Governing Council member Villeroy and analysts from Citi and JPMorgan, who advocate for larger cuts due to the prevailing economic conditions. This coming Wednesday's hearing of ECB President Christine Lagarde before the European Parliament’s Economic and Monetary Affairs Committee is set to be closely watched for further insights into possible rate cuts.In the context of broader market dynamics, US markets showed signs of resilience, particularly in technology stocks, which surged post-Thanksgiving. This uplift helped push the European STOXX 600 index up by 0.35% for the week. Overall, November saw the STOXX 600 index gain 0.96%—its first month of gains since August. The eurozone’s STOXX 50 index saw a smaller increase of 0.32% for the week, though it experienced a decline of 0.48% over the month.Tech stocks were the star performers, with the SX8P index rising by 1.6% on Friday, motivated by anticipation of new export control measures from the US Department of Commerce, which might ease previous restrictions slightly. This sentiment provided a boost for European semiconductor companies such as ASML and Infineon Technologies, whose stocks rallied in response.Conversely, automotive, energy, and banking sectors felt the squeeze last week. The automotive index (SXAP) fell 0.73% as pressures on car manufacturers persisted. The energy sector (SXEP) also struggled due to a decline in oil prices, dipping 1.9% week-over-week. Political uncertainty in France weighed on bank stocks (SX7P), leading to a 0.4% decline.The divergence between US and European stock markets has raised eyebrows among analysts, particularly in light of the S&P 500's roughly 7% rise over the past three months, contrasting with a 2.5% drop in the European STOXX 600 index. Mabrouk Chetouane, head of global market strategy at French bank La Banque Postale Asset Management, pointed to elevated uncertainties in European stock markets stemming from tariff policies and Franco-German political instability as primary investor concerns.Goldman Sachs recently downgraded its earnings expectations for European stocks in a report that recommended investors maintain positions in US equities and a selective overweight in Asian markets, especially Japan, while taking a neutral stance on European markets. Several institutions and analysts remain skeptical about the outlook for European stocks, evidenced by substantial shifts in capital flows. Data from the global fund flow monitoring platform EPFR revealed that US equity funds attracted approximately $441 billion in new inflows so far this year, while European funds witnessed outflows totalling $56 billion.In a surprising turn, Bank of America revised its rating on European equities from "neutral" to "overweight." Sebastian Raedler, the head of European equity strategy at Bank of America, articulated that European indices are experiencing their worst relative performance against US markets since 1976. He highlighted that European fiscal space appears to be improving, while the US economy grapples with a stronger dollar and potentially declining real disposable income. Raedler's takeaway suggests that the eurozone could have strategic upward potential relative to global markets, making European stocks worth considering for investors looking for tactical opportunities.The debate regarding the appropriate extent of interest rate cuts remains contentious within the ECB. On Friday evening, data released by Eurostat indicated that the inflation rate for the eurozone in November rose slightly to 2.3%, crossing the ECB's target level. Core CPI, which excludes volatile categories such as energy and food, maintained a year-over-year growth of 2.7%—falling just below the anticipated 2.8%.ECB Vice President Luis de Guindos remarked on the "satisfactory" performance of the inflation figures, indicating that the rebound was expected. Bai Xue, a senior director of research at Dongfang Jincheng, elaborated on the inflation drivers, attributing the slight rise in November’s CPI to a contraction in prior significant declines in energy prices. However, he noted that the deceleration of inflation remains intact, indicating that inflationary pressures may not be re-emerging in the eurozone. Concerns about deflation were also raised, especially with the eurozone's weakening growth outlook. Bai predicts that economic sluggishness will likely maintain a downward trajectory for inflation throughout 2025, even as deflation risks remain minimal.Market consensus indicates that although eurozone inflation surpassed the ECB's policy target for November, this will not deter policymakers from pursuing a third consecutive rate cut in the upcoming meeting. The ECB maintains that a neutral interest rate should range between 2% and 3%, while current deposit rates hover at 3.25%. Some members of the council are advocating for rates to be cut below neutral levels to stimulate the economy, despite concerns regarding renewed inflation spikes connected to overly accommodative policies.Total consensus among governing members shows that discussions on the extent and pace of rate cuts continue to create a rift within the ECB. Council member Isabel Schnabel has expressed caution against large cuts, stating that borrowing costs are nearing levels that no longer counteract economic growth and stressing that excessive leeway could squander valuable policy options. On the other hand, members like Villeroy and Stournaras champion further economic support, suggesting that if growth stagnates and inflation dips below target levels, further cuts are indeed an option. Speculation about a 50-basis point cut remains on the table, with recent market data suggesting a 13% chance of such a reduction occurring in December, while a 25-basis point cut is nearly fully priced in.The nuanced economic landscape continues to evolve, with November’s inflation data and favorable GDP growth figures providing a backdrop for forthcoming ECB decisions. Despite the indications for careful monetary easing, external pressures—including tariff policies impacting EU exports—could necessitate a more aggressive approach from the ECB. Vigilance toward global economic shifts will be paramount as policymakers navigate the complexities of ensuring economic stability for the eurozone.
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