European shares log weekly losses on inflation worries; Volkswagen jumps

European stocks closed the week on a lower note on Friday, September 4, despite Volkswagen's rally offering some market steadiness. The Stoxx 600 index managed a slight gain of 0.1% to close at 649.88 points, marking a weekly decline of 0.8%. This downturn was driven by geopolitical tensions in the Middle East, which drove up oil prices and heightened worries about persistent inflation, mounting government debt, and prolonged central bank tightening measures.

Meanwhile, the United States reported a strong non-farm payrolls figure, signaling a robust and stable labor market, which bolstered investor confidence in the possibility of a future rate hike by the Federal Reserve.

Investors are now turning their attention to the upcoming US consumer inflation data next week, which could provide a clearer insight into the Federal Reserve's future policy moves. Eric Merlis, managing director and co-head of global markets at Citizens, noted that the Federal Reserve's decision to focus on inflation during the Jackson Hole meeting has been validated, and this report gives the Fed more ammunition to tighten monetary policy in September.

As Europe navigates economic challenges such as sluggish growth and rising energy costs, the market experienced a brief respite on Friday as oil prices dropped in the afternoon and corporate news buoyed investor sentiment. Volkswagen, leading the market upwards with a 5.9% increase, hit a two-month high and outperformed Germany's DAX index.

The German supervisory board of the world's largest automaker had reached a turnaround deal that avoided a confrontation with unions and shareholders. Facing competition from the US in terms of tariffs, a stagnant European market, and aggressive Chinese rivals, Volkswagen has experienced a 22% year-to-date decline in its stock price.

Despite the recent gain, Volkswagen's shares remain down 22% this year. Dan Coatsworth, head of markets at AJ Bell, pointed out that while investors praise significant cost-cutting measures, there is always a risk of cutting too deeply, leaving the company resource-strapped if demand increases. The broader European automotive index benefited from Volkswagen's performance, gaining 1.1% next week.

The market's focus will shift to the European Central Bank's (ECB) policy meeting, where a 25-basis-point rate increase is expected. Financial institutions JPMorgan and BNP Paribas anticipate another 25-basis-point rate hike from the ECB in December, given the surge in energy prices, further supporting the case for additional tightening measures.