European stocks surged in response to a slowdown in US inflation, which fueled expectations of interest rate cuts by the Federal Reserve. The Stoxx Europe 600 Index saw its biggest jump since September 2024, rising by 1.3%. The rally was driven by the latest US economic data, which showed that consumer prices in December rose at a slower pace than forecast. Additionally, the UK’s domestically focused stock index outperformed, buoyed by cooling inflation pressures in the country.
US Inflation Data and Its Impact on European Markets
The key driver behind the European market rally was the release of data showing that US consumer prices rose in December by less than expected, indicating a deceleration in inflation. This marks a shift after several months of higher-than-expected inflation. Following the report, the US 10-year bond yield fell below 4.7%, signaling market expectations of a potential Federal Reserve rate cut by mid-2025, earlier than initially expected.
Jeanne Asseraf-Bitton, head of research and strategy at BFT IM, pointed out that investors are confident in the disinflationary trend. There is growing belief that the Federal Reserve may reduce interest rates earlier than expected if the economic policies of the Biden administration are not as inflationary as feared.
Rally in Interest Rate-Sensitive Sectors
The rally was particularly strong among sectors sensitive to interest rates. Renewable energy stocks surged, with companies like Vestas Wind Systems A/S and Orsted AS leading the way. Vestas saw significant gains, benefiting from the broader market optimism that came with the inflation data. In addition, real estate and retail sectors outperformed the broader market, as investors bet on lower borrowing costs in the near future.
Approximately 87% of the constituents of the Stoxx Europe 600 Index finished the day in the green, reflecting widespread investor optimism. This rally was particularly notable after the index had struggled to maintain upward momentum since reaching a record high in September 2024. The global economic outlook has been tempered by concerns over slow growth and the potential imposition of US tariffs under the new administration.
UK Midcap Stocks Outperform
The UK market also saw impressive gains, with the FTSE 250 index rallying 2.9%. This rise was driven by an unexpected dip in UK inflation, which fell in December for the first time in three months. This has kept hopes alive that the Bank of England may cut interest rates in the upcoming months. The data also helped support the broader economic recovery story in the UK, fueling optimism among domestic investors.
Market Reactions to Company-Specific News
In terms of individual stock performance, there were notable moves in both the European and UK markets. SGS SA, a global testing and certification company, saw its shares fall following news that the company was in talks to merge with Bureau Veritas SA, another European testing and certification giant. The proposed merger would create a company with a combined market value of over $33 billion. Bureau Veritas saw its shares rise as a result of the merger news.
Meanwhile, Ubisoft Entertainment SA saw its stock price rise after Bloomberg reported that the French video-game company’s founding Guillemot family and Tencent Holdings Ltd. were in discussions to create a new venture that would involve certain Ubisoft assets. This news sparked excitement in the gaming sector, particularly for Ubisoft shareholders.
Optimism for European Stocks in 2025
Despite challenges in the broader European economy, including concerns about sluggish growth and potential geopolitical risks, market analysts remain optimistic about the prospects for European stocks in 2025. Joachim Klement, a strategist at Panmure Liberum, emphasized the expected recovery in demand and GDP growth as a reason for optimism in the European stock market.
As European economies continue to navigate post-pandemic challenges, investors are hoping for gradual improvement in economic conditions. The slowdown in inflation, along with expectations of interest rate cuts from major central banks, provides a favorable backdrop for stock market performance across the region.
Conclusion
The rally in European stocks driven by slower-than-expected US inflation and cooling UK inflation signals growing investor confidence in global economic recovery. With sectors like renewable energy, real estate, and retail performing well, and UK midcap stocks outperforming, the positive sentiment is palpable. As European stocks look to sustain their momentum in 2025, continued improvements in inflation and economic conditions will likely drive further optimism. However, market participants remain cautious of potential risks, including geopolitical uncertainties and sluggish growth.
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