A Golden Week for European Stocks

European markets closed their best week in half a year, with the STOXX 600 climbing 0.5% on Friday and hitting a third consecutive record high. The index gained 2.8% for the week, marking a strong rebound for the region’s equities.

This European upswing contrasts sharply with mounting uncertainty in the United States, where the threat of a government shutdown has unsettled investors, weakened the U.S. dollar, and pushed gold prices higher.

Health Sector Leads the Rally

Healthcare stocks were the key driver of the rally, rising 1.3% on Friday. Industry leaders AstraZeneca and Novo Nordisk advanced 1.6% and 2.1% respectively, buoyed by news of a pricing agreement reached by Pfizer in the U.S., which helped calm fears of further regulatory pressure.

UBS analysts said the Pfizer deal, while not an “all clear” for the industry due to missing tariff details, has improved sentiment and reinforced a positive long-term outlook.

Banks and Miners Add Strength

Financial stocks also lifted the broader market, rising 1%. Raiffeisen Bank stood out with a 7.4% jump after reports that the European Union might consider lifting sanctions on Russian billionaire Oleg Deripaska’s assets to compensate the Austrian lender. ABN Amro gained 2.7% after Goldman Sachs upgraded its rating from “sell” to “buy.”

Mining companies rounded out the strong week. The basic resources index climbed 1.7%, supported by higher metal prices. Together, these gains pushed the STOXX 600 to a 12.4% advance for 2025, narrowing the performance gap with the S&P 500, which is up 14.7% this year.

The Fed in Focus Amid U.S. Paralysis

Across the Atlantic, Washington’s budget impasse delayed the release of the crucial U.S. employment report, a key metric for the Federal Reserve’s monetary policy decisions. Yet the absence of data did little to dampen investor optimism in Europe.

According to the CME FedWatch Tool, markets now almost unanimously expect another Fed rate cut before the end of the month. “It does very much feel that the market is looking past the ongoing U.S. government shutdown and focusing on Fed rate cut expectations,” said Fiona Cincotta, analyst at City Index.

That optimism was further reinforced by a disappointing private-sector employment report earlier in the week, which fueled speculation that the Fed will maintain an accommodative stance.

A Delicate Balancing Act for Powell

Still, Fed Chair Jerome Powell continues to warn that each rate move carries risks. The central bank faces a strategic dilemma: while some members, such as Stephen Miran, call for deeper cuts to support employment, others remain wary of persistent inflation, which sits at 2.9%—above the Fed’s 2% target.

Europe’s Mixed Economic Picture

In Europe, the macroeconomic data offered a mixed message. The Eurozone’s services sector expanded at its fastest pace in eight months, led by Germany, while France posted a sharper-than-expected contraction. The UK also showed signs of slowing, with service activity hitting a five-month low.

Outlook: Hope vs. Reality

Whether Europe’s rally can endure will depend largely on the Federal Reserve’s next moves and its ability to strike a balance between employment and inflation. For now, markets are choosing optimism over caution. But as history often reminds investors, economic reality has a way of catching up quickly.