The atmosphere is charged, and financial markets are meticulously preparing for what lies aheadOn the evening of January 19, just before taking office, the incoming leader hinted at an ambitious plan to roll out nearly 100 executive orders on his very first dayThis announcement has sent ripples of anxiety through global markets, with investors bracing for potential disruptions that could stem from these swift policy changes.

As European stocks opened this past Monday, the major indices exhibited a mixed performance, reflecting the complex sentiment that characterizes the European marketOn one hand, measures aimed at deregulating and reducing taxes in the U.Smay provide a boost to the American economy, which could indirectly benefit European stocksOn the other hand, however, the looming threat of extensive tariffs has left investors feeling uneasy about the European economic landscape.

Compounding these concerns are the ongoing earnings reports from companies listed in Europe, alongside fresh data on the ZEW economic sentiment index and the preliminary PMI figures for the Eurozone in January

Advertisements

These indicators are likely to shape market expectations about the economy and the prospects for interest rate cuts.

The question on many investors' minds is whether the recent upward momentum in European stocks can be sustainedLast week saw an optimistic trend in European markets, with yields on British government bonds experiencing a significant decline, alleviating pressure from what had been one of the most substantial sell-offs in over a decadeAll three major European stock indices saw gains, with the UK's FTSE 100 and Germany's DAX 30 both surging over 3%, setting historical records, while the French CAC 40 climbed by 3.75% within the week.

Despite this bullish performance, a closer examination reveals that recent economic data portrays a starkly contrasting pictureAccording to preliminary figures released by the Federal Statistical Office of Germany, the country's GDP is expected to shrink by 0.2% in 2024, marking a second consecutive year of negative growth

Advertisements

Meanwhile, the UK reported an unexpected decline in retail sales in December, falling short of forecasts and reflecting a concerning downturn in consumer spending and a lack of confidence in the Labour government's ability to revitalize the economic outlook.

However, the signs of weakness in growth, coupled with a cooling inflation rate, provide support for the prospect of interest rate reductionsTraders in the swap markets are currently predicting that the Bank of England may cut rates by at least 25 basis points from the existing benchmark of 4.75%, with the odds of a third cut approaching two-thirds.

The recent uptick in European stock prices can largely be attributed to a combination of declining inflation indicators in consumer spending in the U.Sand expectations that the Federal Reserve will continue to lower interest ratesSpecifically, some European Central Bank (ECB) officials have indicated support for a cut of 100 basis points by summer, potentially bringing the deposit facility rate down to 2%. Furthermore, a trade surplus of €12.9 billion in the Eurozone in November, exceeding previous estimates, may signal an improvement in the regional economy.

Apart from macroeconomic factors, the surprising performance of leaders in the luxury and technology sectors has ignited enthusiasm across the European markets

Advertisements

The conglomerate Richemont, for instance, reported a 10% increase in sales for the third quarter of its 2025 fiscal year, resulting in a nearly 17% spike in its stock price and lifting the shares of key players like LVMH, Dior, Kering, and Hermès by over 5% during the week.

Similarly, Taiwan Semiconductor Manufacturing Company (TSMC), the largest semiconductor foundry globally, posted an impressive 57% year-on-year increase in net profit for Q4, exceeding analysts' expectations and buoying European tech stocks such as ASML and SAP, which saw gains of 3.9% and 4.2%, respectively, during the same week.

Moreover, European stocks have benefitted from their relatively low valuations and the positions held by investment firms, with a strong dollar favoring European exportsA recent report from Goldman Sachs suggests that the U.Sstock market may have reached its zenith, while European equities exhibit significant potential, making even non-tech companies attractive investments.

Fiona Cincotta, a senior market analyst at City Index, pointed out that market expectations for earnings in European equities remain low, hinting at a possibility for unexpected upward surprises.

The sustained rally in European stocks has now stretched over four weeks, marking the longest uninterrupted stretch in nearly five months

• U.S. Price Cap Collapses! Oil Prices Surge Above $80
• Japan's Struggles with Deflation
• Global Manufacturing Recovery Gains Momentum
• Facilitating Cross-Border Flow of Factors
• Divergent Performance of the UK Stock Market

Nevertheless, analysts are pondering how long this bullish trend can lastWill we see a continuation of the upward momentum in spring? Should inflation in European consumer markets continue to decrease and anticipation grow for rate cuts from the European Central Bank, the stock markets may continue on their ascendant pathIn a climate of anticipated monetary policy loosening, European equities find themselves in a bullish position this spring, yet caution must be exercised regarding potential tariffs exceeding the 10% forecast by the U.Sgovernment.

Conversely, British government bonds, once victims of a severe sell-off, are now experiencing a reversal of fortunesHopes of a forthcoming rate cut from the Bank of England have revived interest in these bondsAfter reaching their highest yields in years, buyers have begun to re-enter the market, causing the price of British bonds to rebound, with the 10-year yield dropping by 18 basis points to 4.66% for the week, and the 30-year yield reverting to levels seen at the beginning of January.

Investment portfolio manager Gordon Shannon at TwentyFour Asset Management explained that positive inflation news has repositioned UK government bonds as a valuable safe haven investment in the eyes of the market.

Nevertheless, during the COVID-19 pandemic, countries like the United States, France, and the UK took on considerable debt amidst low interest rates, leading to concerns about sustainability

While U.Sbonds often enjoy the status of being the safest assets available, countries like the UK and France continue to grapple with sluggish growth, stirring anxiety among investors regarding fiscal health and debt sustainabilityAs we peer into the future, will these long-term debt concerns further elevate U.Kand European bond yields?

The outlook for the debt market will largely hinge on the pace of interest rate cuts by central banksGiven that December's SPGI Manufacturing PMI for the Eurozone held steady at 45.2, which was below expectations, and considering that some ECB officials support a cut of up to 100 basis points, the prospects for manufacturing in the Eurozone and for major economies like Germany and France appear bleakAdditionally, potential tariffs from the U.Sgovernment on imported goods could further cloud the horizonConsequently, it seems unlikely that the yield curve for European government bonds will sustain a consistent upward trajectory

For the UK, the deceleration in inflation and subpar PMI figures has led to market expectations for a rate cut probability exceeding 70% by the Bank of England in February, with some officials anticipating cuts totaling 100 basis points by 2025. This suggests that the yield curve for UK government bonds, too, may find it challenging to maintain an upward trend.

Meanwhile, not only are European firms facing increased pressure; U.Scompanies operating in Europe are feeling the strain as wellA recent survey from the American Chamber of Commerce to the EU revealed that a striking 90% of American companies in Europe believe that transatlantic economic relations will deteriorate in the coming yearsTwo-thirds of respondents anticipated that U.Spolicies would negatively impact their business in EuropeThe primary concerns revolve around tariffs and trade policies, alongside potential disruptions to supply chain resilience and energy transition efforts.

In the coming week, the preliminary PMI readings for January from the Eurozone, Germany, France, and the UK will take center stage for market participants