STOXX 600 nears all-time high as Europe outshines the US on inauguration day

European stocks continue to outperform their American counterparts, even as Trump officially resumes leadership. While market sentiment remains positive for both stocks and the US dollar, the recent strength of the dollar has tempered gains in domestic stocks. Meanwhile, Europe is gaining the upper hand.

European indices have been trending higher since last Wednesday, when the US core CPI reading came in lower than expected, boosting investor morale. Although headline inflation rose to 2.9% as predicted, the lower-than-expected core reading offered enough encouragement to spur optimism. Markets had previously priced in only one rate cut by the Federal Reserve in 2025, following their December meeting, despite official projections of two. This misalignment in expectations seemed justified by higher inflation. However, the softer CPI core reading has led investors to reconsider, suggesting that pricing in just one rate cut might have been overly cautious.

This shift in rate expectations improved sentiment in equities last week, causing the dollar to weaken. The European Central Bank’s more dovish stance has further supported European equities. As a result, the German DAX 40 climbed to an all-time high of 21,000 points, while the STOXX 600 rose 3.3% last week. However, bullish momentum has slowed as the index approaches a long-standing resistance area around 525. This level has repeatedly halted rallies in the past year so buyers will likely face a tough challenge to consolidate above it. The next target is likely to be the all-time high of 528, achieved last September.

STOXX 600 daily chart

Past performance is not a reliable indicator of future results.

FTSE 100 Climbs to New Highs Amid Softer UK Inflation

Meanwhile, the FTSE 100 reached a new all-time high, fuelled by softer CPI readings in December, which increased market expectations of a rate cut by the Bank of England next month. The weakening economic landscape in the UK—evident from disappointing GDP, industrial production, and retail sales figures—might have dampened trader sentiment. However, the softer inflation data provided relief. The FTSE 100 surged 3.8% over the last three trading sessions of the previous week, breaking above 8,500 points. Despite this, the index is encountering resistance in its bid to consolidate gains.

FTSE 100 daily chart

Past performance is not a reliable indicator of future results.

US Stocks Face Uncertainty Amid Political Developments

For US stocks, the presidential inauguration day started off on the right foot as Trump’s initial focus was on an immigration crackdown, and on culture war issues. He failed to mention any plans on tariffs until the end of the day, focusing his plans on the biggest US trading partners - Mexico and Canada, which caused sentiment in US equities to reverse towards the end of the session.  

However, he failed to mention anything about tariffs on China, which seemed bizarre. This seems to confirm that Trump is focused on markets and what they think. Trump could be looking for a deal with China, which could defer tariffs, which would be risk-positive for stocks. Only time will tell, and for now Trump seems to be keeping his cards close to his chest.