Good news for European stock markets! The STOXX 600 index soared to a strong start in the new year, fueled by upbeat manufacturing data from the eurozone. This statement suggests that the economic downturn may not materialize, and investors are more optimistic. In addition, consumer discretionary and autos assets saw impressive gains, while luxury brands like LVMH rose.

Investor Optimism

Analysts at Commerzbank Research are predicting an upbeat start to the year, thanks to higher 10-year bund yields (a measure of how much it costs to borrow money) and relaxed year-end trading. In addition, analysts expect a drop in HICP inflation (a measure of the price of goods and services), raising investor hopes.

Early indicators support this optimism as data suggests that the decline in manufacturing activity in the eurozone has likely surpassed its dippest low as supply networks recover and inflation pressure eases. This newfound optimism among company managers could bode well for the markets.

The optimism is also because technology stocks, among the worst performers last year, saw a 1.5% uptick on the first day of 2023. This development comes despite more hawkish signals from the European Central Bank, whose President, Christine Lagarde, warned that eurozone wages are growing fast and could add to already high inflation.

The STOXX 600’s losses last year were due to factors like central banks’ aggressive policy tightening to control rising prices, an economic slowdown, ongoing concerns about the Russia-Ukraine conflict, and an increase in Covid cases in China.

Bond Yields and Stock Market Performance

Bond yields are returns an investor can expect to receive on a bond. When bond yields drop, the price of the bond increases, which can be a sign of increased demand for the bond. For example, Germany, Europe’s largest economy, dropped from significantly high levels.

This drop could be because investors anticipate lower inflation in Germany and seek safer investments, such as bonds. The German finance minister expects inflation in Germany to fall to 7% this year and to continue falling in the coming years.

The stock market in Germany, measured by the DAX index, also saw a positive start to the year with a 1% gain. Other European stock exchanges also had a positive start to the year, though the London and Dublin stock exchanges were closed for the New Year’s Day holiday.

Additionally, Croatia has recently become the European Union’s youngest member. It has joined the Schengen zone (a region comprising 26 European countries that have abolished passports and other types of border control at their mutual borders) and the use of euro currency. These changes could impact the economy and financial markets in Croatia and the European Union.