Europe: Stocks gain, but inflation worries drive weekly decline

European stocks experienced an overall gain on Friday (Aug 21), as investors focused on signals of economic resilience. However, the Stoxx 600 index concluded the week lower, with high oil prices and elevated Treasury yields keeping worries about inflation alive.

The pan-European Stoxx 600 index finished 0.6% higher at 654.18 points, continuing its downward trend for the second consecutive week. The US Treasury's announcement of measures to provide liquidity support briefly boosted risk appetite, but this impact was short-lived.

Despite the Middle East conflict, Europe's economy demonstrated strength due to limited exposure to artificial intelligence trade and a clearer monetary policy outlook. The Eurozone business activity, as measured by the S&P Global Flash Eurozone Composite PMI Output Index, reached its highest level since November, indicating growth in manufacturing activity and renewed export expansion.

While investors are cautious about interpreting recent data due to inflation uncertainties, the region continues to present a cautiously optimistic picture. Geoff Yu, a senior EMEA market strategist at BNY, noted that "Europe continues to offer a cautious recovery signal. Industrial improvement without a broad demand surge is close to a Goldilocks outcome for now – enough growth to improve confidence, but not enough to remove the ECB’s need for vigilance."

In terms of sectoral performance, luxury stocks rose by 1.4%, rebounding from a sharp decline in the previous session. Basic resources led sectoral gains, up 2.5% as a weaker dollar boosted gold prices. European equities saw a weekly inflow of $2.44 billion, the largest since the week before the US-Iran war erupted. Retailers advanced by 1%, with JD Sports gaining 5.6% after recovering from a 14% drop the previous day due to its revised profit forecast.

Money markets remain on edge, anticipating a more aggressive European Central Bank. The ongoing US-Iran conflict in the Middle East further complicates the outlook for inflation. US Treasury Secretary Scott Bessent elaborated on President Donald Trump's pledge of economic warfare against Iran, stating that the US would impose the "toughest sanctions in history" on Iran. These threats reduced optimism about a deal to fully reopen the Strait of Hormuz, driving up Brent crude prices by 0.5%.

Energy, utilities, and defence sectors were among the few that declined in value, while individual performers included Nibe Industrier, which rose 8.8% following strong second-quarter results from the Swedish heat pump manufacturer, and Straumann, which fell 3.3% after Deutsche Bank downgraded the Swiss dental implants maker to "hold" from "buy," citing rising risks and CEO transition.