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The rally in European stock markets took a breather as EU leaders struggled to secure a €5 billion funding package for Ukraine. Investor sentiment was further dampened by the ECB’s cautious outlook on the economy and inflation, triggering selloffs, particularly in the defence and automotive sectors.
ADVERTISEMENTEuropean stock markets lost momentum on Thursday, with all major benchmark indices closing lower as investor optimism waned due to economic and geopolitical uncertainties. The defence-led rally faded, and German stocks bore the brunt of the downturn, with the DAX sliding 1.24%, led by sharp selloffs in industrial and automotive shares. Optimism over Germany’s fiscal reform also faded after EU leaders failed to present a concrete strategy to support Ukraine.The pan-European Stoxx 600 Index declined by 0.43%, while France’s CAC 40 fell 0.95% and Spain’s IBEX 35 dropped 0.76%.At a summit in Brussels on Thursday, the leaders of the 27 EU member states failed to reach an agreement on a €5 billion ammunition aid package for Kyiv, as France and Italy hesitated to commit to specific financial contributions. The bloc is also under pressure to assert its role to avoid being sidelined in the peace talks after US President Donald Trump brokered a 30-day ceasefire agreement on energy and infrastructure in Ukraine with the Kremlin and Kyiv.A group of European nations, including Germany, Italy, and Poland will meet in Paris next week to further address their position in Ukraine peace talks, with the UK, Canada, and Ukraine also expected to attend.ECB’s economic outlook spurs stagflation concernsOn the economic front, ECB President Christine Lagarde highlighted the negative implications of Trump’s tariffs and retaliatory measures. She reiterated a “data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance,” stressing that the ECB is “not pre-committing to a particular rate path”.Lagarde stated that the US’ 25% tariff on the EU imports, along with countermeasures, is expected to slow the bloc’s growth by 0.5% while lifting inflation by the same percentage. Her comments, which echoed the Federal Reserve’s statement on Wednesday, heightened fears of global stagflation—a scenario of slowing economic growth coupled with elevating inflation—considered a bearish signal for equity markets.Defence and auto stocks retreat sharplyEuropean defence stocks, which had recently reached record highs, fell sharply following the day’s events. The Euro Stoxx Aerospace & Defence Index declined 2%, with shares in German arms manufacturer Rheinmetall plunging as much as 12% before recovering to close 3.2% lower. The stock had already dropped 4.5% in the previous session after a strong rally since mid-February.Other major defence stocks also suffered losses, with Airbus falling 2.3%, BAE Systems down 1.76%, Rolls-Royce sliding 2%, and Safran declining 1.79%.The automotive sector also saw steep declines due to mounting concerns over trade barriers. Volkswagen fell 4.15%, BMW dropped 3.53%, Mercedes-Benz lost 2.44%, Porsche declined 3.4%, and Stellantis retreated 3%.Carmakers are considered among the most vulnerable to trade tensions due to their extensive international exposure and manufacturing operations in Canada and Mexico — both of which have been primary targets of Trump’s tariffs.Despite Thursday’s downturn, the sector had been on an upward trajectory since December, benefitting from Europe’s broader market outperformance.The ECB’s accommodative monetary stance and Germany’s progress on debt reform had contributed to the sector’s recent strength.The euro weakensThe euro fell against the US dollar for the second consecutive trading day on Thursday, dropping to around 1.0850 during the early Asian session.The EUR/USD pair had reached 1.0953 on Tuesday, its highest level since 6 November, amid optimism over the EU’s fiscal plans to boost defence spending.However, despite the German parliament passing a historic spending bill on Wednesday, the currency’s upside momentum faded.
