European stock markets continued their rally on Friday, with major indices hitting multi-decade highs. The Euro STOXX 50 gained 0.6% in morning trading, reaching levels last seen in September 2000. Germany’s DAX index set a new record despite ongoing recession concerns, and Italy’s FTSE MIB surged to its highest level since 2007.
Key Drivers of the Rally:
- ECB Rate Cut Expectations:
Investors anticipate a 25-basis-point rate cut at the ECB’s January 30 meeting, with more easing likely later in 2025. Lower interest rates typically boost equities by improving financial conditions for companies. - Weaker Euro Enhances Exports:
The euro's depreciation to its lowest level since November 2022 has bolstered export-heavy industries like automotive, industrials, and luxury goods. This also helps offset potential new US tariffs on European goods. - China’s Economic Rebound:
China's stronger-than-expected GDP growth of 5.4% in Q4 2024 has fueled demand for European exports, benefiting industries such as Germany’s automotive sector and luxury brands from France and Italy. - Underweighted European Equities:
According to a Bank of America survey, European stocks were significantly underweighted by investors, creating room for sharp rebounds as portfolio rebalancing occurs.
Despite the rally, risks loom. Rising energy prices—Brent crude up 10% and natural gas prices surging 40%—could hurt energy-dependent industries. Geopolitical uncertainties, including potential new US tariffs and Germany’s upcoming election in February, may also impact market sentiment.
While the rally is underpinned by ECB rate cut expectations, export competitiveness, and China’s recovery, volatility could resurface if macroeconomic or political risks materialize. For now, these factors are providing a robust foundation for European equities.
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