European stocks have generally retreated from their historical highs. Last week, the Euro STOXX 600 index fell by 1.80%, the Eurozone STOXX 50 index fell by 2.22%, and the FTSE Eurofirst 300 index fell by 1.8%.

Persistent concerns about sluggish growth in the Eurozone have caused European stocks to lag behind global major capital markets last month. Morgan Stanley economists believe that Europe is still in a "weak recovery," but the market is also looking for short-term drivers and profit opportunities for European stocks.

Geopolitical risks have increased significantly, and it remains to be seen whether European stocks can find support.

Last week, the military conflict between Iran and Israel escalated, with risk aversion dominating. The three major European stock indices all fell, with the German DAX 30 index falling by 1.81% and the French CAC 40 index falling by 3.21%, both hitting new lows in nearly two weeks, and the UK FTSE 100 index fell by 0.48%.

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Most sectors experienced declines, while energy and defense stocks rose against the trend.

Luxury consumer stocks fell sharply after a significant increase a week ago. Over the past five trading days, LVMH fell by 5.88%, Hermès fell by 5.71%, and Richemont Group fell by 2.31%.

Risk aversion was high, and blue-chip stocks also performed poorly. L'Oréal fell by 3.88%, SAP fell by 1.88%, and Novo Nordisk fell by 0.54%.

The energy sector rose significantly along with the surge in crude oil prices. Last week, the "oil and gas powerhouse" Norway OSE benchmark index rose by 3.02%, and the Norway OBX index rose by 3.36%. Shell rose by 5.42%, BP rose by 6.07%, and TotalEnergies rose by 5.10%. The defense sector also rose sharply, with Rheinmetall rising by 7.88% and BAE Systems rising by 3.89%.

Hu Zinan, a researcher at the German Studies Institute of Tongji University, told a reporter from the 21st Century Economic Report that due to Europe's high dependence on Middle Eastern oil, the surge in oil prices driven by geopolitical conflicts will not only increase production costs for businesses but may also weaken consumer purchasing power, thus posing a threat to the prospects for European economic growth.叠加投资者普遍选择减少风险敞口转向避险资产，进一步增加欧股抛售压力。

As the situation in the Middle East continues to escalate, it is necessary to be vigilant about increased volatility in related sectors. Hu Zinan warned that sectors such as aviation and tourism, banking and finance, automotive manufacturing, building materials, and chemicals are more susceptible to the impact of the Middle East situation.Overall, geopolitical instability does not constitute a shock to the fundamentals. Carol Schleif, Chief Investment Officer at BMO Family Office, stated that unless there is a significant escalation in geopolitical conditions, economic growth in the Eurozone should remain stable, thereby providing support for the stock market. "From a fundamental perspective, there are many clues supporting the market to continue to rise, but will it be a straight line? Not necessarily."

Seeking upward momentum

In September, major central banks around the world began to ease, with the European Central Bank, the Federal Reserve, and the People's Bank of China successively lowering interest rates to release liquidity. However, the European STOXX 600 index fell by 0.28% last month, and the CAC 40 index fell by 0.14%. The rise in European stocks is significantly lagging behind major markets such as the US stocks and A-shares.

According to past patterns, European stocks usually rise in the fourth quarter, but under the low growth, investors may need to look for clearer market clues.

Hu Zinan believes that looking forward to October, the European market still has the potential to gain some upward momentum, which may come from several aspects. First, the European Central Bank is expected to start a new round of interest rate cuts. In September, the inflation rate in the Eurozone unexpectedly fell below the target level set by the European Central Bank. Based on this, the market generally expects that the European Central Bank may adopt a more accommodative monetary policy stance at the upcoming October meeting. Second, the third-quarter earnings season for listed companies. If the profit situation of most companies can exceed market expectations, especially if export-oriented companies and high-tech companies perform well, market sentiment is likely to be significantly boosted. At the same time, the depreciation trend of the euro may bring additional competitive advantages to export companies.

Furthermore, the situation in the Middle East may ease. Hu Zinan said that on the one hand, Iran has so far remained restrained in its military retaliation against Israel, aiming to avoid triggering a larger-scale war. On the other hand, the United States does not support a full-scale conflict between Israel and Iran. Therefore, although the situation in the Middle East is tense, it is still possible to avoid a large-scale war. If this expectation is realized, the market will gradually digest the uncertainty brought by geopolitical conflicts, and the sentiment of risk aversion will weaken, and the European stock market may resume its upward trend. In particular, cyclical sectors in the European stock market, especially industries that are greatly affected by geopolitical and energy price fluctuations, such as industry and manufacturing, may rebound.

For a long time, European stocks have been considered a safe haven for investors due to their stable performance. However, Michael Field, a European market strategist at Morningstar, pointed out that this is only the overall situation, and the performance of each sector is indeed uneven. The performance of investors' returns largely depends on where and what they invest in, and this situation will not change even as the last quarter of the year arrives.

Will James, a European equity fund manager at Morningstar, believes that after decades of negative interest rates, financial stocks will continue to be driven by the earlier interest rate hikes and will continue to grow in the fourth quarter. However, they also face the risk of a significant slowdown in economic growth or even a slight recession.

Tom O'Hara, a European portfolio manager at Janus Henderson Investors, said that China's strong market rescue measures and the Federal Reserve's timely interest rate cuts have led to a soft landing for the economy. It seems that the recovery of cyclical industries should be quite smooth, and he is also optimistic about the recovery of luxury goods and other non-essential consumer goods.

Citigroup strategists David Groman and Beata Manthey suggest that investors first increase their holdings of "selected" defensive stocks to hedge against the volatility brought by the US election, and then switch to cyclical stocks related to the economy.Some investors are attempting to shift their focus from the United States to Europe, targeting European stocks that have significant operations in the U.S. but are valued much lower than their American counterparts. Novo Nordisk, which produces a best-selling weight loss drug, derives nearly 60% of its revenue from the U.S., and the defense giant BAE Systems in the UK generates nearly 50% of its revenue from the U.S. market, yet these companies have price-to-earnings ratios significantly lower than their American competitors.

Louise Dudley, a portfolio manager at Federated Hermes, stated that a European company that meets European corporate governance standards but also uses the U.S. market as a growth driver is an attractive company. In July, Goldman Sachs urged clients to establish positions in about 45 European companies with substantial operations in the U.S.

Inflation Cools, ECB May Accelerate Interest Rate Cuts

Recently, the Eurozone is experiencing a significant cooling of inflation. Last Tuesday, Eurostat, the statistical office of the European Union, announced that the Eurozone's September CPI fell by 0.1% month-on-month, marking the largest decline since January of this year, and increased by 1.8% year-on-year, falling below the European Central Bank's 2% target for the first time since 2021.

Christine Lagarde, the President of the European Central Bank, stated in a declaration to the European Parliament last Monday that the central bank is more confident that the inflation rate will return to the 2.0% target, which further fueled expectations of an interest rate cut. She indicated that the central bank will take this into account at the October meeting.

The market's bet on the probability of the ECB cutting interest rates by 25 basis points in October has soared to 90%. Jussi Hiljanen, Chief Strategist for Euro and U.S. Dollar Interest Rates at SEB Research, a research department of the Swedish Nordea Bank, stated that any move other than a rate cut in October would now be hard to justify.

Moreover, against the backdrop of increasing growth pressures in the Eurozone, some institutions believe that the ECB will also abandon gradualism and accelerate the pace of interest rate cuts.

SEB forecasts that the ECB will cut interest rates at every meeting from now on, reducing the deposit rate from the current 3.50% to 2.00% by June 2025. Morgan Stanley expects the ECB to cut interest rates by 25 basis points continuously from October 2025 to March, and then reduce the deposit rate to 1.75% by the end of next year at a more gradual quarterly pace.

Mr. Hu Zinan stated that the cooling of inflation and insufficient recovery momentum provide strong support for interest rate cuts. However, consecutive interest rate cuts will exert certain downward pressure on the euro. Therefore, it is highly likely that the European Central Bank will adopt a small and gradual interest rate reduction strategy, and then decide on the next steps based on the macroeconomic situation, including whether the Federal Reserve continues to cut interest rates, the performance of the Eurozone economy, and the market's reaction to this interest rate cut.

This week, the Eurozone will release August retail sales data. However, previously released savings rates indicate that due to the bleak economic outlook, Europeans are more inclined to save rather than consume, which will further hinder economic growth. Whether the latest retail consumption data can provide an optimistic signal is worth the market's attention. In addition, several members of the ECB's governing council and executive board will give speeches this week, which may provide more clues on the direction of monetary policy.