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European Markets Set to Return from the Long Easter Break with a Positive Open

Nathaniel StoneTuesday, Apr 22, 2025 1:23 am ET

2min read

As European markets reopen following the Easter break, investors are greeted by a landscape of cautious optimism. Recent weeks have seen a mix of central bank stimulus, trade-related diplomatic progress, and sector-specific dynamics lifting equities, though lingering risks tied to U.S. tariffs and geopolitical tensions continue to weigh on sentiment. Let’s dissect the drivers behind this rebound and what lies ahead.

Market Performance: A Sector Divide

European equities staged a strong recovery, with the STOXX Europe 600 Index rising 3.93% from April 14 to April 22, buoyed by policy easing and hopes of U.S.-EU trade resolution. Italy’s FTSE MIB surged 3.5% to 34,180, benefiting from ECB rate cuts and a rebound in automotive stocks. Meanwhile, Germany’s DAX lagged slightly, reflecting lingering anxieties over export-dependent sectors like automotive.

The automotive sector led the charge, gaining 2.3% after U.S. President Donald Trump hinted at potential tariff relief. This optimism was amplified by his claim of a “100% chance” of a U.S.-EU trade deal. However, the luxury sector stumbled, with LVMH shares plunging 8% after the company reported a 3% drop in Q1 sales. Weak demand for cognac and fashion items in key markets like the U.S. and China highlighted the fragility of high-end brands amid trade tensions.

Key Drivers of the Rally

ECB Rate Cuts and Policy Support:
The European Central Bank (ECB) cut its deposit rate to 2.25% on April 18, its seventh reduction in a year. This move aimed to counter inflationary pressures and support growth amid U.S. tariff threats. Markets now price in a potential June rate cut to 2.0%, further easing financial conditions for rate-sensitive sectors like banking and real estate.
Trade Policy Developments:
While U.S. tariffs remain a Sword of Damocles, recent diplomatic gestures—such as Trump’s positive rhetoric and the EU’s 90-day pause on retaliatory tariffs—have eased near-term fears. The delay of semiconductor tariffs and exemptions for select tech items also provided relief.
Corporate Earnings and Sector Resilience:
While LVMH stumbled, smaller firms like Arteche Lantegi Elkartea (renewable energy solutions) and Mühlbauer Holding AG (smart card/EV tech) outperformed. Their niche markets and low debt levels insulated them from broader sector risks.

The Underlying Challenges

Despite the gains, risks loom large:
- Trade Uncertainty: The EU’s 90-day tariff pause is a fragile truce. Without a durable agreement, retaliatory measures could reignite volatility.
- Geopolitical Risks: The ZEW economic expectations index for Germany plunged to -14 in April, its worst reading on record, reflecting extreme anxiety over U.S. trade policies.
- Consumer Caution: In the UK, 33% of businesses considered layoffs due to economic pessimism, while households cut discretionary spending amid rising core expenses.

Looking Ahead

The ECB’s accommodative stance and trade optimism have provided a floor for equities, but the path forward hinges on two critical factors:
1. Trade Deal Progress: A U.S.-EU agreement would be a game-changer for automotive and luxury stocks.
2. Inflation Dynamics: Eurozone core inflation has fallen to 2.1%, but supply chain disruptions and energy price volatility could disrupt this trend.

Conclusion

European markets are poised to open with gains, but the rebound is uneven and fragile. The STOXX Europe 600’s 3.93% rise and Italy’s FTSE MIB surge reflect investor relief over ECB support and trade diplomacy. Yet sectors like luxury (LVMH’s 8% drop) and automotive remain hostages to geopolitical whims.

Investors should focus on companies with diversified revenue streams and low debt, such as Arteche or Mühlbauer, while keeping a wary eye on U.S. tariff deadlines. The ECB’s next move—potentially cutting rates to 2.0%—could provide further support, but without meaningful progress on trade, this rally may prove short-lived.

In short: Buy the dip, but don’t bet on a lasting bull run until trade clouds clear.

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