European Markets Rally as Investors Shift Toward Cyclical Sectors

European stock indices posted solid gains, with the Stoxx Europe 600 closing 1.3% higher, marking its best daily performance in over two weeks. The rally was fueled by a significant shift in capital from defensive to cyclical sectors, particularly industrials, which rose 2.1%, and financials, up 1.8%. The move followed mixed signals from central banks, with the European Central Bank signaling a pause in rate hikes while maintaining a cautious stance on future policy adjustments. Investors appear increasingly confident in a soft-landing scenario for the global economy. Recent data showed eurozone inflation cooled to 2.4% year-on-year in November, below the ECB’s 2.5% target, while industrial production and manufacturing PMI figures pointed to underlying resilience in the region’s output. These developments bolstered expectations that further monetary tightening may be unnecessary, supporting risk appetite. Among individual stocks, Deutsche Bank surged 4.7% on stronger-than-expected loan growth and improved credit quality, while Siemens Energy advanced 3.5% following a major offshore wind contract win in the North Sea. In the auto sector, Stellantis rose 2.9% after reporting a 12% increase in November sales across Europe, signaling stronger consumer demand for vehicles. The rotation into cyclical assets also extended to smaller-cap equities, with the STOXX Europe 600 SmallCap Index gaining 2.0%, outpacing the broader benchmark. This suggests growing confidence in corporate earnings growth for the first half of 2026, particularly in capital-intensive industries tied to infrastructure and green energy projects.