Indecisive start in Europe after bumper week

• Indecisive start in Europe as PMI data highlights weak growth outlook
• US markets pricing in lower chance of December hike
• Market volatility to ease as earnings and central bank impact eases

European markets have kicked off the week on a hesitant tone, with traders left wondering whether last week’s dramatic surge represents an opportunity to sell or a sign that the bulls are back at the helm. The DAX managed to post a 3.4% gain over the course of last week, representing its best weekly performance since March 2023. This morning has been dominated by European PMI surveys, which served to highlight the remarkable Spanish services outperformance (51.1) in the face of sharp contraction seen across Italy (47.7), Germany (48.2), France (45.2), and the wider eurozone (47.8). Nonetheless, the direction of travel for eurozone growth remains tilted to the downside, with sharp contraction across both manufacturing and services expected to inform ECB thinking going forward.

In a week that was dominated by central bank activity, Friday’s jobs report appears to have provided a goldilocks scenario for those hoping for an end to the Federal Reserve’s tightening process. Weak payrolls data, higher unemployment, and lower-than-expected wage growth figures saw the Fedwatch December hike expectations fall back below 10%, having stood around the 30% mark earlier in the week. To add fuel to the fire, Friday’s surprise collapse in the US ISM services PMI survey (51.8 from 53.6) further highlighted the Fed’s need to hold off in anticipation of a potential downturn for the US economy.

Looking ahead, US markets look set for tentative gains at the open, with all eyes on big tech after a dramatic surge for the Nasdaq last week. With markets now pricing in a lower chance of additional tightening from the Fed, we have seen both big tech (Nasdaq) and small caps (Russell 2000) outperform. This week marks a significant cooling off period as the influence of earnings and economic data releases start to fade. With that in mind, the price action seen this week should provide a good temperature check for markets having seen central banks and the vast majority of Q3 earnings reported.