Europe close: Stocks flat as rate-cut hopes dampened

European stock markets closed in a mixed fashion on Friday, with the Stoxx 600 index flat as central bankers poured cold water on hopes that interest rate cuts were on the horizon.

The Stoxx 600 finished the session up just 0.05%, with heavy falls in London and Madrid offsetting gains in Frankfurt, Paris and Milan.

"Stock indices are beginning to run out of steam following six to seven weeks of straight gains," said Axel Rudolph, senior market analyst at IG.

Markets were in positive territory early, extending gains on the back of rising hopes that the Federal Reserve was beginning to look ahead to potential rate cuts next year after the FOMC dotplot graph on Wednesday showed policymakers were bringing forward their expectations for monetary loosening.

However, sentiment was dampened by comments from New York Fed President John Williams who told CNBC that policymakers "aren’t really talking about rate cuts right now". He said: "I just think it’s just premature to be even thinking about that."

On Thursday, both the Bank of England and European Central Bank also dampened optimism: the ECB claimed that rate cuts weren't discussed at this week's meeting, while the BoE said rates would stay high for "an extended period"

"Given the sharp move in bond markets since Wednesday it was perhaps felt necessary to pour a little cold water on the moves of the last 48 hours, with Williams sent out to say it was premature to be thinking in terms of rate cuts," said analyst Michael Hewson from CMC Markets.

"That’s not to say they wouldn’t happen next year but to be pricing in between five to six rate cuts next year as markets appeared to be doing seems to be a case of getting a little carried away."

Economic data comes in mixed

A flash reading of the eurozone composite purchasing managers' index for December fell to 47.0 from 47.6 the month before, surprising economists who had expected a pick-up to 48.0. The manufacturing PMI remained at a six-month high of 44.2, but was short of expectations, while the services PMI dropped more than forecast to 48.1.

UK business activity rose to a six-month high in December. The S&P Global/CIPS flash UK composite output index ticked up to 51.7 from 50.7 in November. This was above consensus expectations for a reading of 51.0.

Meanwhile, Chinese industrial output grew by 6.6% in November on an annual basis, its fastest pace since February 2022 and beating expectations for 5.6%. Data also revealed that retail sales were up 10.1% last month, although analysts had expected a 12.5% spike following a low base in 2022 when the country was in the grip of of stringent zero-Covid curbs in the last quarter of the year.

In other news, Germany's central bank scaled back its growth projections, forecasting a meagre rebound in economic activity after a contraction in 2023. The Bundesbank said calendar-adjusted real gross domestic product would increase by just 0.4% in 2024 following a 0.1% decline this year. That's down from an earlier prediction in June that pencilled in 1.2% growth next year. Looking ahead to 2025, the monetary authority is now estimating 1.2% growth in 2025, below the previous forecast of 1.3%.

Atos jumps, UK pharma stocks slump

Shares in French IT firm Atos surged after major shareholder Onepoint raised its stake in the company to 11.4% from 9.9% and said it plans to keep buying stock and seek board representation.

Market chatter was also pointing to reports that Airbus was in "advanced" talks with Atos about division Eviden's big data and cybersecurity operations, causing shares to jump 21% by the close.

Comments from US senator Elizabeth Warren were weighing heavily on drugmakers GSK and AstraZeneca after she accused the companies of "abusing" the patent system to manipulate drug prices.

German fragrance and flavour maker Symrise fell after cutting its fiscal year 2023 outlook, citing lower raw material prices and exchange rates.

Swedish clothing giant H&M Group finished higher despite reported flat sales in its fourth quarter with comparators from its now-exited Russia and Belarus business weighing on growth.

Davide Campari-Milano, the Italian spirits company famous for its Campari brand, announced plans to buy Courvoisier from Beam Suntory for $1.3bn, causing shares to fall in Milan.

Meanwhile, in London, news that the Department for Transport has canned plans to create a Great British Railways ticketing website and app sent shares in booking platform Trainline to a yearly high, up 13% on the day.