European markets recoup most losses; Autos gain on tariff exemption

European stock markets closed marginally lower on Thursday after the ECB cut interest rates by a quarter point. Germany's Dax was up 1.59%, and the Cac 40 added 0.29%. However, the U.K.'s FTSE 100 was trailing behind and shed 0.8%.

The regional Stoxx 600 was down 0.03%.

— Sawdah Bhaimiya

The three major indexes kicked off Thursday's session in the red.

The Dow lost 0.95% shortly after 9:30 a.m. ET, while the S&P 500 slid 1.4%. The Nasdaq Composite dropped 1.9%.

— Alex Harring

The European Central Bank is in a difficult situation given the threat of U.S. tariffs and pressure for states to increase defense spending, Mark Wall, chief European economist at Deutsche Bank, said in a note on Thursday.

"The ECB finds itself in a challenging position between the threat of U.S. tariffs in the near-term that could warrant further policy rate cuts — and a move into stimulative territory – and the growing commitment to higher defense spending over the next several years which will be required to secure Europe's strategic autonomy," Wall said.

"This environment requires a deft hand on the monetary policy lever and the preservation of policy optionality," he added.

The ECB cut interest rates by 25 basis points on Thursday, saying monetary policy was becoming "meaningfully less restrictive."

— Sawdah Bhaimiya

"The disinflation process is well on track… Staff now see headline inflation averaging 2.3% in '25, 1.9% in '26 and 2% in '27," European Central Bank President Christine Lagarde said at a news conference following the ECB's interest rate cut announcement. "The upward revision in headline inflation for 2025 reflects stronger energy price dynamics."

"Most measures of underlying inflation suggest that inflation will settle at our 2% medium-term target on a sustained basis," she added.

— Chloe Taylor

The European Central Bank updated the language in its interest rate cut decision on Thursday, describing monetary policy as now being "meaningfully less restrictive."

Paul Donovan, chief economist at UBS Global Wealth Management, questioned whether the ECB's change in language tells markets anything about the rate path going forward.

"Frankly, it's the case that they would say that, wouldn't they? They've been cutting rates for some time now, and they have started, slowly, to reduce the real inflation-adjusted interest rate," he told CNBC's Julianna Tatelbaum. "If they were going to say, no, monetary policy is still restrictive in spite of everything we've done, they'd look rather foolish… it's an expression of the fact that they are doing what they said they were going to do."

"The key point here is the ECB is on a path to, I think, a 2% nominal refi[nance] rate," Donovan added. "That's their end objective, and from an economic point of view, whether they get there over the next two meetings or the next three meetings, it doesn't make that much of a difference. The end game is that rates are coming down, we're going to a more neutral real interest rate of more or less around 0%, so that's what's going to be important in macroeconomic terms."

— Chloe Taylor

The European Central Bank on Thursday cut interest rates by 25 basis points, with the bloc's growth prospects in focus following tariff threats from U.S. President Donald Trump.

This brings the ECB's deposit facility rate, its key rate, to 2.5% — a move that markets had widely priced in before the announcement.

Read the full story here.

— Sophie Kiderlin

Government borrowing costs rose across the globe on Thursday, with German bonds resuming the sell-off that sparked the biggest daily jump in yields since the country's reunification 35 years ago.

Bond prices and yields move in opposite directions, meaning that yields tick higher when the value of the asset declines.

Yields on German government bonds — known as bunds — skyrocketed on Wednesday, with the yield on the 10-year debt instruments adding around 30 basis points. The sell-off came after lawmakers from parties widely expected to form Germany's next coalition government agreed to plans to reform historic debt policy rules to allow an increase in national defense spending.  

Read the full story here.

— Chloe Taylor

Analysts at Goldman Sachs said Germany's proposed fiscal reform could mark "a new era for European equities."

"The prospects of a large German fiscal package and growing Europe-wide defense budgets have significantly boosted European equity performance, with most indices up more than 10% [year to date], and DAX up 16%," they said in a Thursday note to clients.

European shares still traded at a "larger-than-average discount to the U.S. market," they said, arguing that there was "modest upside for European stocks."

"But [we] also acknowledge there are downside risks post the strong rally," Goldman's analysts said. "These include slowing U.S. growth, potential legislative hurdles to the fiscal spend, and rising bond yields in Europe. Our recommendations continue to include a Long in Defense and a Long on Fiscal Infrastructure, which we see as broader beneficiaries of the fiscal changes."

— Chloe Taylor

President Donald Trump's return to the White House has completely shifted America's stance on support for Ukraine, prompting European nations to consider new options to bolster military support for Kyiv.

European leaders are coming together to stand behind Ukraine amid the waning US support. One of the mechanisms Europe has at its disposal to make up the shortfall of American backing is to fully seize frozen Russian assets held in the region. 

Read the full story here.

— Lily Meckel

Air France-KLM shares spiked 18% on Thursday, heading for their best session since November 2020, after the Franco-Dutch airline group beat profit expectations in its annual results.

Operating income decreased 6% year-on-year to 1.6 billion euros ($1.73 billion), above the 1.35 billion euros forecast in an LSEG-compiled analyst estimate, while fourth quarter operating income was nearly double expectations. Revenue for the period was 5% higher at 31.46 billion euros, roughly in line with expectations.

Group CEO Benjamin Smith said the company had seen a particularly strong fourth quarter.

Air France passenger numbers fell 0.1% annually while KLM's rose 8.8%. However, the Dutch section of the business struggled with a steeper profit decline amid cost pressures.

Analysts at Deutsche Bank said the group supplied a "confident outlook" following a strong fourth quarter.

The company "has delivered 17% ahead of consensus for 2024 [earnings before interest and taxes] and given guidance which implies upside to 2025 consensus," they said in a Wednesday note.

— Jenni Reid

German automotive companies were in the green on the Stoxx 600 index on Thursday morning, after the country's incoming government announced potential fiscal reforms and U.S. President Donald Trump granted a tariff exemption to automakers.

German auto giant Mercedez Benz was up 5% on the Stoxx 600 Index, alongside auto manufacturer Porsche which rose 3.3%, Volkswagen's 3.4% gains and Continental AG, also up 3.3%. BMW, listed on the Euro Stoxx 50 exchange, was also 3.3% higher.

These moves come after the incoming German chancellor Friedrich Merz and other political leaders announced plans to reform fiscal policies including a 500 billion euro special fund for infrastructure.

Separately, the White House announced a one month tariff exemption for automakers in Canada and Mexico on Wednesday, after Trump spoke with the heads of General Motors, Ford Motor, and Stellantis a day earlier.

— Sawdah Bhaimiya

German airline group Lufthansa on Thursday reported a 39% annual decline in earnings before interest and taxes (EBIT) to 1.65 billion euros ($1.78 billion), after a year marked by staff strikes, increased global price competition and aircraft delays.

While group revenue rose 6% to 37.6 billion euros, adjusted free cash flow plunged 54%, while its operating margin narrowed to 4.4% from 7.6%.

"Pressure on operating margins remains high due to cost inflation as well as the shortage of materials and staff," the company said.

CEO Carsten Spohr said demand for air travel remained positive, but that strikes by various employee groups and its partners, price pressures from market-wide capacity growth, high cost inflation and ongoing aircraft delivery delays had all led to a lower annual profit.

In its outlook, Lufthansa forecast a "clear increase" in revenue and adjusted earnings "significantly above" 2024, with free cash flow "roughly on par."

— Jenni Reid

European markets are expected to open in mixed territory Tuesday.

The U.K.'s FTSE 100 index is expected to open 17 points higher at 8,136, Germany's DAX up 15 points at 20,922, France's CAC 40 points lower at 7,221 and Italy's FTSE MIB 135 points higher at 34,180, according to data from IG.

Earnings are set to come from Ericsson and Publicis on Tuesday, and data releases will include European industrial production figures, the latest U.K. unemployment data and the German ZEW survey of economic sentiment.

— Holly Ellyatt