European Stocks Recover From Early Weakness, Close Broadly Higher

European stocks closed higher despite OECD downgrading UK's growth forecast to 1.3% for 2025 and 1.0% for 2026 due to potential tariffs and cutting its global growth forecast to 2.9% from 3.1% for 2025. Eurozone inflation eased to 1.9% in May, below expectations, while the unemployment rate edged down to 6.2%, matching a record low; these factors contributed to market volatility, with sector-specific movements dominating trading as investors await key U.S. economic data.

Analysis

European stock markets exhibited resilience, closing broadly higher with the pan-European Stoxx 600 edging up 0.09%, the UK's FTSE 100 gaining 0.15%, Germany's DAX climbing 0.67%, and France's CAC 40 rising 0.34%, despite a backdrop of heightened economic uncertainty. This cautious optimism was tempered by the Organization for Economic Co-operation and Development's (OECD) downward revision of its global growth forecast to 2.9% for 2025, from a previous 3.1%, and a specific downgrade for the UK's growth to 1.3% for 2025 and 1.0% for 2026, attributed primarily to potential trade tariffs from the Trump administration and broader policy uncertainty weighing on consumer confidence and investment. Positively influencing sentiment, Eurozone inflation unexpectedly eased to 1.9% in May, falling below the European Central Bank's 2% target and consensus expectations of 2.0%, with core inflation also slowing more than anticipated to 2.3% from 2.7%. Complementing this, the Euro Area unemployment rate declined to a record low of 6.2% in April. France also reported a significant narrowing of its government budget deficit to EUR 69.3 billion in April 2025, from EUR 91.6 billion year-on-year, buoyed by a 42% surge in revenues against a softer 3.2% rise in expenditures. Individual stock performance varied significantly: in the UK market, Centrica rallied nearly 4.5% and British American Tobacco (BTI) advanced after raising its annual sales target, while Pearson (PSO) declined over 6.5% and Rentokil Initial (RTO) fell 3.4%. In Germany, Siemens Energy and SAP (SAP) gained 1 to 2%, whereas Zalando dropped nearly 4%. French markets saw STMicroElectronics (STM) rise over 3%, contrasting with losses for Orange (ORAN) at 3.8% and Teleperformance at 3.2%. Investors are now keenly awaiting key U.S. economic data, particularly non-farm payroll figures, which are expected to provide further market direction.

Key Decisions for Investors

• Maintain a selective approach to European equities, prioritizing companies with robust fundamentals and demonstrated resilience against potential trade disruptions, given the mixed signals of positive regional economic data versus downgraded global growth forecasts and tariff uncertainties.
• Closely monitor upcoming U.S. non-farm payroll data and any further announcements regarding U.S. trade policy, as these are critical near-term catalysts that could significantly impact market sentiment and overall asset allocation.
• Consider focusing on specific outperformers, such as British American Tobacco which raised its sales guidance, or sectors that may benefit from easing Eurozone inflation and low unemployment, while exercising caution with stocks exhibiting significant negative momentum or high sensitivity to global trade headwinds.