European equities experienced a significant rally this week, driven by a combination of China’s stimulus plans and easing inflation. The Euro Area Stoxx 600 index climbed 2.69% in the week ending September 27, reaching a record high and extending its year-to-date gain to 10.1%. Germany’s DAX40 also closed the week at a record level, gaining 4% after a 1.22% increase on Friday.
Despite the recent surge, investors remain cautious due to lingering geopolitical and economic concerns. Slow economic growth, volatile natural gas prices, and persistent inflation have dampened European economic sentiment. GDP is projected to end 2024 at a mere 0.8%, reflecting the challenging economic environment. Geopolitical developments, including the ongoing war in Ukraine and the upcoming U.S. elections, have further added to the uncertainty surrounding European markets.
European policymakers have expressed concerns about potential negative consequences for climate change, security, and trade if Donald Trump secures a second term as U.S. president. Additionally, fears of a broader Middle East conflict intensified after Israel’s airstrikes killed Hezbollah leader Hassan Nasrallah in Beirut on Friday. The EU has expressed “extreme concern” about the escalating confrontation between Israel and Hezbollah, emphasizing that any further escalation would have severe repercussions for the region and beyond.
However, European investors have welcomed the People’s Bank of China’s (PBOC) “stimulus blitz” aimed at addressing the country’s economic headwinds. The PBOC announced a series of bold measures, including a 50-basis-point cut to banks’ required reserve ratios (RRR), a 20-basis-point cut to the seven-day reverse repurchase rate, and 500 billion yuan ($71.3 billion) in liquidity support for stock buybacks. This stimulus package has provided a much-needed boost to investor confidence, particularly in the fashion and automobile sectors.
Following the PBOC’s announcement, European fashion and automobile stocks experienced the most significant gains. France’s LVMH LVMHF surged 19.2% for the week, while Hermes HESAY rose 16.5%. German automobile manufacturers also saw substantial gains, with Volkswagen VWAGY up 7%, Mercedes-Benz Group MBGAF up 6.55%, and BMW BMWYY up 6.6%. Germany’s automobile index closed the week with an impressive 8.70% gain.
European companies operating in China have been apprehensive about the impact of the slowdown in the world’s second-largest economy on their profitability. China’s economic growth slowed to 4.7% in the second quarter, from April to June, marking the slowest pace since the first quarter of 2023 and falling short of forecasts of 5% to 5.3%.
Adding to the positive sentiment, recent inflation data has further bolstered European equities. Preliminary German data revealed that inflation slowed to 1.6% in September, down from 1.9% in August. France and Spain also reported inflation below 2% on September 27, exceeding analysts’ expectations. This encouraging inflation data has increased the likelihood of the European Central Bank (ECB) cutting interest rates next month, currently estimated at a 70% chance.
Despite the recent positive developments, some investors remain cautious. While inflation is coming down, it is not declining fast enough to expect a rapid easing of interest rates. However, European consumer sentiment has shown signs of improvement. The Euro Area’s consumer sentiment index rose 0.5 points in September to -12.9, aligning with preliminary estimates. This increase was driven by a more optimistic outlook on households’ expected financial situation. Consumer confidence also rose moderately in Germany, France, and Italy, Europe’s three largest economies. However, the Nuremberg Institute for Market Decisions (NIM) cautioned against premature optimism, suggesting that the improvement in Germany may be more of a stabilization at a low level rather than a sign of a substantial recovery.
