European markets close higher as STOXX 600 hits record, FTSE posts weekly gains

Europe's major stock markets ended higher on Friday, with the pan-European STOXX 600 and Germany's DAX reaching fresh record highs as investors welcomed easing expectations for near-term US interest rate hikes and rotated into cyclical sectors.

The STOXX 600 climbed 0.7% to close at a record high after touching an intraday peak of 652.35, registering its strongest weekly gain since mid-May.

Germany's DAX advanced 0.8% to another all-time closing high.

In the UK, the FTSE 100 added 0.2% to close at 10,679.03, securing a weekly gain, while the FTSE 250 rose 0.5%.

Cyclical stocks lead European rally

The advance was driven by strength in cyclical sectors, including industrials, financials and defense stocks, as investors broadened their focus beyond technology shares.

"So, not only are Europe's indices less exposed to the AI trade, but they are also relatively cheap."

Defense stocks rose 0.7% as Russia launched its deadliest strike on Ukraine this year, reinforcing expectations for increased defense spending across Europe.

Banks, financial services and industrial companies were also among the week's strongest performers as easing tensions in the Middle East supported broader market sentiment.

Germany's Siemens gained 2.6% after Kepler Cheuvreux upgraded the stock to "hold" from "reduce."

Semiconductor-related stocks also rallied, with Aixtron jumping 6%, while Soitec and BE Semiconductor Industries gained 5% and 4.2%, respectively.

French benefits company Pluxee rose 7.8% after reporting a smaller-than-expected decline in third-quarter organic sales.

FTSE supported by financials, miners and chemicals

In London, financial stocks helped lift the FTSE 100.

Close Brothers Group surged 7.9%, while Lion Finance Group and Standard Chartered gained 2.8% and 1.5%, respectively.

Precious metals miners rose 1.4% as gold prices strengthened after weaker-than-expected US employment data reduced expectations of a near-term Federal Reserve interest rate hike.

Chemical stocks also outperformed, rising 2.5%.

Johnson Matthey climbed 4.9% after receiving Chinese regulatory approval for the sale of its Catalyst Technologies business to Honeywell. The company said it expects the transaction to close by the end of August.

Central bank outlook remains in focus

Markets continued to assess the outlook for monetary policy following softer US economic data and fresh comments from European policymakers.

A weaker-than-expected US jobs report on Thursday strengthened expectations that the Federal Reserve could delay further interest rate hikes.

Meanwhile, euro zone inflation data released earlier this week showed price growth slowed more than expected in June.

European Central Bank President Christine Lagarde said risks to inflation and economic growth had become more balanced than they were only a few weeks ago.

According to LSEG data, traders now expect the ECB to raise interest rates by a total of 23 basis points this year.

In the UK, Bank of England policymaker Catherine Mann said lower market expectations for future rate increases since the June Monetary Policy Committee meeting would be an important consideration ahead of the central bank's policy decision later this month.

Investors also monitored UK economic data, which showed businesses maintained elevated price expectations in June despite easing energy costs following the de-escalation of the Iran conflict.

A separate survey indicated Britain's services sector contracted for a second consecutive month, recording its weakest performance since early 2023 as the effects of the conflict continued to weigh on business activity.