European Stocks Close Muted

European stock indices closed with small movements on Monday as markets continued to assess how the corporate sector will fare against higher interest rates, with the threat of higher budget deficits and political uncertainty lifting sovereign yields. The Euro STOXX 50 inched up by 0.1% to 6,399 and the STOXX Europe 600 was unchanged at 649.8. The German far-right AfD party won state elections in Saxony-Anhalt over the weekend, the party's first major victory, to extend the momentum of political fragmentation in Europe. Bund yields surged with the outlook of wider deficits combined with inflationary risks from soaring natural gas prices, as the European Central Bank is due to deliver its second rate hike of the year this week. Insurance stocks tumbled, with Munich Re down 3% while Allianz fell nearly 1%. Meanwhile, ASML gained 2.3% and Infineon soared 6.4% as strong signals by Korean chipmakers supported the sector.

Stocks in Europe kicked off the week on a cautious note, with both the STOXX 50 and STOXX 600 trading around the flatline as investors continued to monitor developments in the Middle East and the political situation in Germany. The far-right AfD secured a historic victory in the state elections in Saxony-Anhalt. The result represents a setback for Chancellor Merz, with his CDU recording its worst-ever result in Saxony-Anhalt since German reunification. Meanwhile, oil prices moved higher amid renewed strikes involving the US and Iran. Investors are also looking ahead to the ECB's monetary policy decision this week, with the central bank widely expected to raise borrowing costs. Shares of Novartis fell more than 3% after its cholesterol drug failed to meet expectations in a closely watched study. In contrast, ASML Holding rose 1.2% and Infineon gained 1.8%, while the energy sector traded in positive territory, led by TotalEnergies, which advanced 1.6%.

European equity markets were poised for a subdued opening on Monday as caution prevailed amid expectations that major central banks could raise interest rates in the near term. Markets increased bets on a Federal Reserve rate hike this month after stronger-than-expected US jobs data. The European Central Bank is likewise expected to raise rates this week to 2.75%, with investors also pricing in another hike in December. Rate expectations were reinforced by rising inflationary risks as oil prices climbed further after the US and Iran exchanged strikes on ships over the weekend. Meanwhile, investors will assess another reading of Eurozone Q2 GDP along with final data on employment changes during the quarter. In premarket trading, Euro Stoxx 50 and Stoxx 600 futures were little changed to slightly lower.