European stocks snap two-week slide as Fed resolve

European equities saw a respite on Friday from their most significant daily surge in over two months, as the Federal Reserve's determination to combat inflation offered reassurance to investors. The Stoxx Europe 600 Index slipped by 0.21%, temporarily retreating from a one-week high marked on Thursday. Germany's DAX and France's CAC 40 experienced a 0.4% decline, while London's FTSE 100 dropped by 0.3%.

Despite the brief consolidation, the pan-European benchmark was poised for a 0.54% weekly increase, marking a recovery from a dismal start to the week when the main index plummeted to its lowest level since June. This turbulent week was characterized by extreme commodity volatility and a series of central bank policy announcements.

On Tuesday, continental equities plummeted, with the Stoxx 600 Index reaching its lowest point since mid-2023. The decline was triggered by a targeted assault on Saudi Arabia's East-West pipeline, which was threatening up to 4% of global oil supplies, and additional Houthi strikes in the Red Sea. Brent crude prices surged past $113 a barrel, and the U.S. 10-year Treasury yield crossed the 5% threshold for the first time since 2007.

However, sentiment shifted dramatically on Thursday following the Federal Reserve's unanimous decision to raise interest rates by 25 basis points to 3.75% – a first rate hike since mid-2023. Chair Kevin Warsh's firm demeanor reassured market participants that the central bank remained committed to controlling energy-driven inflation, regardless of political pressure from the Trump administration.

This instilled confidence in the equity market, leading to the Stoxx 600's best single-session performance in over two months. The Bank of England also played a role in stabilizing the market, maintaining its benchmark rate at 3.75% in a 6-3 vote, and warning that higher global energy input costs could necessitate a 4.00% rate hike at its November meeting if the Persian Gulf transit issue persists.

Despite a 1.5% drop on Friday, Brent crude futures were still up nearly 15% for the week, hovering near $104 a barrel. The decline in oil prices occurred as maritime shipping firms and energy corporations secured alternate bypass routes around Persian Gulf bottlenecks, including additional crude shipments through Oman. Rate-sensitive sectors experienced a minor pullback on Friday, with the index covering Europe's leading luxury and personal goods manufacturers falling by 0.4%.