European Stocks Steady on Data, Notch Best Week Since Mid-July

(Bloomberg) -- European stocks posted their best week since mid-July, supported by gains from earlier in the week, and as US data suggested a further Federal Reserve interest rate hike is less likely.

The Stoxx Europe 600 Index was largely unchanged at close in London, paring gains from earlier in the session. Energy stocks outperformed after Morgan Stanley double-upgraded the sector, while autos were laggards after UBS Group AG analysts cut ratings on Renault SA and Volkswagen AG.

Among individual stocks, Aurubis AG plunged after being hit by a massive metal theft while Vestas Wind System A/S rose after it said it's close to landing a large order to deliver turbines for a US onshore wind park. 

Sentiment has been somewhat subdued this week after data showed a drop in China's manufacturing activity for a fifth consecutive month. Meanwhile, euro-area inflation stopped slowing in August, presenting European Central Bank officials with a quandary as they weigh whether price pressures are too persistent to risk a pause in interest-rate hikes.

Today's US jobs report was “all in all pretty positive,” said Arnaud Cayla, deputy managing director at Cholet Dupont. “It vindicates the scenario of gradual disinflation and that we are moving towards a plateau when it comes to interest rates.” 

Separately, Wolf von Rotberg, equity strategist at Bank J. Safra Sarasin said another hike is “definitely less likely after the labor market data today while the cycle still looks strong enough to carry on for somewhat longer.”

Still, Federal Reserve Bank of Cleveland President Loretta Mester said US inflation remains too high despite recent improvements, and the labor market is still strong, which somewhat dampened the reassuring sentiment from jobs data. 

On the policy front in Europe, new forecasts will show that the ECB's inflation outlook hasn't changed much over the summer, even though prospects for the economy worsened, according to ECB Vice President Luis de Guindos. Meanwhile, Morgan Stanley thinks the latest economic figures mean the European Central Bank will not hike interest rates any further.

The combination of weak economic data and sticky inflation is “a nightmare scenario for the ECB,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank. The ECB should raise rates to continue fighting inflation, even though the underlying economies are under pressure, she added.

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--With assistance from Farah Elbahrawy and Julien Ponthus.

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