It has been a week of sharply contrasting fortunes across Europe’s major equity markets, and this morning’s (22 October) open has only deepened the divergence. Yesterday saw the beginnings of a solid recovery, as the Euro Stoxx 50 closed up 1.5% at 6,213, the DAX gained 1.35% to 25,645, and the CAC 40 added 1.06% to reach 7,922, only for those gains to be slashed at the open today, with the CAC 40 falling 1.4%, the DAX losing 1.0%, and the FTSE 100 dropping 0.5%, as French fiscal anxiety and bond market turbulence reignited. The FTSE 100 has lagged the key EU indices most this week, weighed down by UK inflation coming in hotter than expected at 3.5% in September, which prompted the Bank of England to ease its rate-cut timetable. Year-to-date, the picture across Europe could not be further from homogeneous: the DAX is up a solid 4.5% from its January open, Milan’s FTSE MIB has been the continent’s star performer with +14.3%, while the CAC 40 sits roughly 2.8% lower for the year in one of the poorest performances among major global indices - the reasons for which are becoming increasingly difficult to attribute to temporary factors. Meanwhile, the Fed’s hawkish posture in the US is keeping global bond yields elevated and compressing equity risk premiums everywhere.
In general, two structural themes are shaping Europe’s equity market narrative as the fourth quarter begins in earnest: the uneven but in places encouraging earnings season that has given investors pockets of genuine optimism to trade around, and the slow-burning French fiscal crisis that is threatening to become the eurozone’s most destabilising political and financial situation since 2012.
SAP, ASML, and the technology rotation
Against the ever-present backdrop of geopolitical uncertainty and bond market volatility, Europe’s Q3 earnings season has delivered more relief than many had feared. SAP, the DAX’s largest constituent and Europe’s most valuable technology company, led the German index higher yesterday (21 October) with a gain of 3.5% ahead of its own quarterly results. It is now obvious why the market was anticipating them so eagerly: results revealed Q3 revenue of €10.3 billion, well in excess of consensus, and a cloud business that has become the engine of the entire company, continuing to outgrow analyst projections as enterprise AI adoption drives demand for SAP’s ERP infrastructure at a pace the company itself appears to be struggling to accommodate. ASML, the Dutch semiconductor and lithography giant whose equipment underpins virtually every advanced chip manufactured on Earth, provided the week’s other major positive catalyst with a strong fourth-quarter sales forecast. This lifted its semiconductor peers across the continent, including ASM International (up 1.5%), BE Semiconductor (up 0.8%), and Infineon Technologies (up 1.6%). EssilorLuxottica was the week’s most dramatic individual mover, rallying 15.5% on Tuesday after the Ray-Ban owner posted outperforming third-quarter revenue. Airbus gained close to 2.7% and Siemens Energy added 2.5% over the week, with the latter benefiting from the continued surge in demand for power infrastructure driven by AI data centre buildouts across Europe. The one significant exception to the tech rally has been Rheinmetall, which fell 3.2% in Wednesday’s session (21 October), extending a difficult stretch for European defence names that have now given back a meaningful portion of their extraordinary 2025 gains. For the DAX and Milan specifically, the earnings picture provides a real foundation for controlled optimism, but as one analyst noted, “sticky German inflation, high energy prices, and a possible further ECB hike mean the rally rests entirely on earnings delivery.” Indeed, the ECB’s playbook is being further constrained by the US Fed’s own stance. With the CME FedWatch tool now pricing an 86% probability of a December Fed hike, European policymakers face the uncomfortable reality that any dovish pivot on their part would widen the rate differential with the US, weaken the euro, import inflation, and effectively undo whatever easing they were trying to achieve.
The French connection
The story that has dominated cross-asset trading desks in Europe this week is not continent-wide earnings but France, and specifically the combination of fiscal deterioration and social unrest that has pushed the France-Germany 10-year yield spread beyond 160 basis points for the first time since the eurozone debt crisis, with French 10-year OAT yields briefly touching 5% earlier this morning for the first time since 2002. Analysts say lenders would like to see a credible fiscal consolidation plan that would prevent France from being caught in a debt spiral: weak growth and a persistently high deficit-to-GDP ratio are pushing up bond yields, raising the government’s debt-servicing bill and widening the deficit further - which could drive borrowing costs higher still. France’s budget deficit currently stands at approximately 5.4% of GDP, well above the EU’s 3% threshold, and Prime Minister Sébastien Lecornu’s minority government is struggling to amass the parliamentary support needed to pass even a 2027 budget, let alone the structural reforms that would give international investors confidence in a credible fiscal roadmap. Widespread civil unrest across several major French cities has compounded the anxiety, with the CAC 40 dropping more than 1% on Monday (19 October) before partially recovering on the strong earnings noted above. ECB President Lagarde sought to snuff out speculation that Frankfurt would activate its Transmission Protection Instrument to suppress French borrowing costs, reinforcing that investors must continue to price an elevated risk premium for French OATs. Goldman Sachs senior European equity strategist Sharon Bell told CNBC: “One of the reasons OAT-Bund spreads are not coming in is because investors are sceptical that you will see any fiscal consolidation,” adding that there will be “an almighty clash between whoever wins the next election” and the ECB before any intervention becomes likely. For European equity investors, the French situation creates an uncomfortable and highly specific asymmetry: the ECB’s capacity to cut rates and provide a broad tailwind to European equities—just as the Fed remains largely hawkish and US valuations are stretched—is being constrained by an inflation picture that has not yet fully resolved, while simultaneously being complicated by the need to avoid any action that appears to bail out Paris’s fiscal indiscipline. The December ECB meeting and the November French budget vote that precedes it are the two events that will have the most decisive impact on the risk premium inherent to European equities right now, and on both, the range of possible outcomes is huge.