Euro Stocks Retreat After Hitting Record Highs, Fed Aggressively Cuts Rates

Last week, the world ushered in a "Super Central Bank Week," with the Bank of Japan and the Bank of England standing pat, while the Federal Reserve's 50 basis point "preemptive" rate cut still brought a wave of warmth to the European and American markets.

Boosted by the expectation of easing, European stocks surged to near historical highs last Thursday, but were suppressed by the growth prospects of major industries and gave back most of the gains the next day.

At the close of European stocks last Friday, the Euro Stoxx 600 index fell by 1.42%, down 0.33% for the week.

The Eurozone Stoxx 50 index fell by 1.45%, up 0.57% for the week.

The three major European stock indices also experienced a rise and fall.

The German DAX 30 index closed at an annual high last Thursday, breaking through the 19,000 mark, and after falling back on Friday, it rose by 0.11% for the week, the French CAC 40 index rose by 0.47% for the week, and the UK FTSE 100 index fell by 0.52% for the week.

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Despite the Eurozone economy still being overshadowed by weak growth, analysts generally look forward to the rise of European stocks at the end of the year, with monetary policy easing increasing the possibility of a soft landing and supporting the rise in European stock valuations, although volatility will continue to exist.

This week, a series of key economic data will be released, with the Eurozone, Germany, France, and the UK's September PMI preliminary values being an important window to observe the trend of economic recovery.

The French September consumer confidence index and the German October Gfk consumer confidence index will reflect whether consumer activity can support growth.

In addition, the Riksbank and the Swiss National Bank will announce their latest interest rate decisions on Wednesday and Thursday, respectively, and the market estimates that the two central banks are highly likely to press the rate cut button.

Last Thursday, the Fed's aggressive rate cut led to a full-line rise in European major stock indices.

The Eurozone Stoxx 50 blue-chip index closed up by 2.24%, the largest single-day increase in nearly half a year.

The European Stoxx 600 index closed at 521.67 points, close to the historical high of 525.05 points set on August 30.

Last Friday, European stocks fell back, with most sectors falling, led by the automotive, technology, and luxury stocks, while utilities and telecommunications sectors were the only ones to rise.

The main reason for the decline in optimistic sentiment is related to the poor profit prospects of leading companies.

The automotive sector is the industry sector with the largest decline, with Volkswagen announcing the closure of German factories first, followed by Mercedes-Benz lowering its annual profit target for the second time in two months, causing its stock to plunge by 6.8% in a single day.

The contraction of leading companies has led analysts to worry about the European automotive industry.

Rolf Ganter, Chief Investment Officer of UBS European Equities, said that if negative factors continue to ferment, such as the weakness of major automobile consumer markets, the decline in automobile prices, and the rise in labor costs, the situation could further deteriorate, which could lead to a further decline in some companies' stock prices by 10%-20%.

"Automotive stocks are indeed very cheap in valuation, but we are not optimistic."

The European luxury goods sector has also been heavily sold off due to warnings of poor profits from institutions.

Last week, Goldman Sachs said in a report that although the market has digested some weak factors, analysts still see downside risks in the luxury goods industry and expect the next six months to be very difficult.

Jefferies also downgraded the ratings of Burberry and Swatch to underperform last week and lowered the target price of LVMH by 13%.

Worries still exist, and analysts generally believe that the volatility of European stocks will continue in the short term.

Roland Kaloyan, Head of European Equity Strategy at Societe Generale, believes that Europe's growth has always been weak and is expected to continue, so he tends to maintain the target price of the European Stoxx 600 index at 500 points this year, setting a target of 530 points for 2025.

At the same time, he also warned that political uncertainty and concerns about the economic cycle could keep the market in a range fluctuation like the past six months, but also provide more opportunities for active investors.

Beata Manthey, a strategist at Citigroup, also tends to believe that volatility may continue to exist in the short term, so the investment strategy will continue to be the growth/defensive stock preference since mid-July.

However, the easing cycle will still benefit the stock market trend at the end of the year.

Richard Hunter, Head of Market at Interactive Investor in the UK, said that the market expects the Fed to continue to cut interest rates significantly before the end of the year, and the outlook at the end of the year will be very optimistic as long as the economy does not go into recession.

UBS strategist Gerry Fowler said that the discount rate cut will support a slight expansion of European stock valuations, but at the same time, profit expectations are still weak, and it is also necessary to pay attention to whether the consumer market can warm up next year, and whether interest rate-sensitive markets such as the UK, Northern Europe, and Spain can be stimulated by monetary policy easing.

Last week, the Fed's interest rate cut came true, and the aggressive cut of 50 basis points also left more room for other central banks to ease.

Stefan Gerlach, Chief Economist at EFG Bank in Zurich, said last week that although the European Central Bank has been opposing the option of consecutive interest rate cuts, the Fed's aggressive interest rate cut may prompt the European Central Bank to consider cutting interest rates again next month, starting the third interest rate cut since June.

For a long time, the European Central Bank and the Bank of England have been cautious and gradual in cutting interest rates to deal with inflation risks, but after the Fed's significant interest rate cut, how likely is it for the European Central Bank and the Bank of England to follow the Fed's pace?

Wei Hongxu, a researcher at the Macroeconomic Research Center of Anbang Think Tank, analyzed to the reporter of 21st Century Economic Report that the Fed's 50 basis point interest rate cut is indeed somewhat aggressive, reflecting more of its concern about the slowdown of the US economy.

This will not have much impact on the pace of the European Central Bank's interest rate cuts.

On the one hand, the European side has already cut interest rates twice ahead of the Fed, totaling 50 basis points.

On the other hand, the "stagflation" problem in Europe is still serious, with the core harmonized CPI in the Eurozone in August at 2.8% year-on-year, the same as the previous value, indicating that service industry inflation is still high, and inflation still has stickiness.

The pace of interest rate cuts may cause inflation to rebound, which is not conducive to the European economy.

Therefore, from the European perspective, its future interest rate cut path will still be a gradual process, seeking a balance between economic slowdown and inflation decline.

Dirk Schumacher, an economist at Natixis, also believes that the European Central Bank following the Fed's pace in cutting interest rates in October is an absurd argument and will not be accepted by the European Central Bank's management committee.

Unless the Fed's interest rate cut affects the fundamental data of the Eurozone, which may be true, but it has not been seen yet.

Last week, the Bank of England voted to keep the benchmark interest rate unchanged at 5%, which was in line with broad expectations.

The Bank of England stated that it is still appropriate to "gradually" ease monetary policy when the service industry inflation rate is still "high."

Wei Hongxu said that the main factor behind the Bank of England's inaction this time is actually inflation.

The inflation level in the UK has picked up again in July and August, forcing the central bank to adopt a cautious strategy.

Next, the Bank of England is likely to cut interest rates again at the next meeting, and this intermittent interest rate cut rhythm is similar to the current path of the European Central Bank.

Last week, while the Bank of England announced that interest rates would remain unchanged, it also announced the promotion of a trillion-pound quantitative tightening plan - to reduce the holdings of government bonds by 100 billion pounds within the next 12 months.

Previously, the Bank of England had stimulated the economy by purchasing a large number of bonds after the financial crisis, and is now gradually withdrawing from this stimulus measure, but the Bank of England's QT has also raised market concerns about liquidity contraction.

Wei Hongxu explained that the Bank of England's trillion-pound quantitative tightening plan is to continue to exit the previous unconventional monetary policy and achieve the normalization of monetary policy.

The exit from QE will have a contractionary effect on market liquidity, but it will also help to continue to curb inflation.

Of course, the quantitative tightening may have a considerable impact on the issuance of UK sovereign bonds, increasing its fiscal pressure and to some extent bringing about a reduction in fiscal deficits.

Looking at the Bank of England's monetary policy thinking, Wei Hongxu summarized that this approach of cutting interest rates to "step on the gas" while quantitative tightening to "step on the brakes" is actually a reflection of the current monetary policy's cautious maneuvering in the dilemma of "stagflation," neither stepping on the gas too hard, causing inflation to rebound, nor stepping on the brakes too much, causing the economy to decline, but only finding a path to achieve a "soft landing" in this way.

Looking forward to this week, the central banks of Sweden and Switzerland are highly likely to continue interest rate cuts.

The Swiss National Bank has cut interest rates twice this year, a total of 50 basis points, and the market generally expects the Swiss National Bank to start its third interest rate cut this year, with the recent strong rise of the Swiss franc against the US dollar also supporting this decision.

Ulrich Leuchtmann, Head of Foreign Exchange and Commodity Research at Commerzbank, said that the interest rate cut seems to be a foregone conclusion, and the only question may be how much to cut.

The Riksbank cut interest rates ahead of the European Central Bank in May this year, and the market generally expects the Riksbank to cut interest rates again by 25 basis points to 3.25% this week, with some analysts also saying that there is a possibility of a 50 basis point sharp interest rate cut.

Citigroup analysts predict that it will continue to cut interest rates this year, and the speed of interest rate cuts will accelerate in 2025.

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