Europe

The STOXX Europe 600 gained 1.3% in local currency terms, but the aggregate conceals a week of striking divergence. The ECB's decision to raise rates by 25 basis points on Thursday - its first hike since 2023 - was the defining event, and its impact played out very differently depending on where in Europe you were invested.

For Spain and Italy, whose equity markets are heavily weighted toward banks, the hike was unambiguously positive: the IBEX 35 surged 8.4% and the FTSE MIB added 3.6% as investors priced in a more sustained period of net interest margin support. For Germany, it was the opposite. The DAX fell 0.4%, caught between rising energy costs, a softer growth outlook, and a central bank that is now tightening into a weakening industrial cycle. The same policy decision that rewarded southern European financials served as a further headwind to the export-oriented manufacturers that anchor the German index.

The ECB's revised projections reinforced the uncomfortable backdrop. With headline inflation now forecast at 3.0% for 2026 and GDP growth revised lower, the Governing Council is effectively signalling that the Iran-driven energy shock is not transient, and that it intends to respond accordingly. The implications for European equity allocators are meaningful: the rate-cut tailwind that supported the market earlier in the year has reversed, and the intra-regional divergence between financially exposed southern markets and industrially exposed northern ones looks set to persist. Consumer staples and discretionary names held up reasonably well across the continent, offering some evidence that domestic demand has not yet buckled under the weight of higher prices and tighter policy.

Rest of the world

Asia was the week's weak spot. The Taiwan TAIEX fell 2.3% and MSCI Japan lost 1.6%, both continuing to digest the prior week's semiconductor-driven shock. The Korea market stabilised but only modestly, with the recovery tentative after the KOSPI had plunged more than 8% in the prior session as fears grew around the AI cycle. The sharp divergence between the US semiconductor rebound and the continued softness in the TAIEX is instructive: US-listed ETF flows recovered quickly as the SpaceX overhang cleared, but the earnings revision cycle for Asian chip producers, particularly in memory, moves more slowly, and investors remained cautious about re-engaging aggressively. MSCI EM was flat in aggregate, with the weakness in North Asia offset by a 2.4% gain in Brazil, supported by commodity price strength, and a broadly stable performance elsewhere.

China slipped 0.7% and Japan's underperformance stood out given the broadly more constructive global tone by Thursday and Friday. For Japan, yen dynamics and the Bank of Japan's policy trajectory remain a source of uncertainty: imported energy inflation complicates the case for continued accommodation, while a stronger yen would weigh on the export-oriented corporates that dominate the index. These cross-currents help explain why Japanese equities failed to participate in the Thursday-Friday recovery that lifted other markets. The broader Asian picture reflects a region caught between strong structural tailwinds from AI semiconductor demand and short-term vulnerability to geopolitical shocks, rate-cycle pivots in the West, and the concentration risks embedded in indices dominated by a handful of chipmakers.

Valuation

Although equity prices have reached new record highs, forward P/E multiples have edged lower because EPS growth has outpaced share price gains. Valuations remain above historical averages in the S&P 500 and Nikkei, while the STOXX Europe 600 and Asia ex-Japan look relatively more attractive.

Risks

The main risk to this constructive view is a renewed rise in rates and inflation expectations, which could compress multiples and pressure valuations.