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European shares edge higher on Fed rate-cut expectations; airline stocks slide

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  Published in Travel and Leisure on Thursday, September 4th 2025 at 12:36 GMT by reuters.com
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European Shares Gain Momentum as Fed‑Rate‑Cut Hopes Rise, While Airlines Slip on Weak Demand

European equities edged higher on Thursday, buoyed by growing expectations that the U.S. Federal Reserve will trim rates in the near term. Even as the broader market rose, airline stocks slipped sharply, reflecting lingering concerns over travel demand, fuel prices and regulatory pressures.

Market Overview

The MSCI Europe index finished up 0.3 %, climbing to 5,860 points, its strongest gain since early September. The Euro Stoxx 50 mirrored the rally, posting a 0.4 % lift to 6,260, while the broader Euro Stoxx 600 moved 0.3 % higher. The most resilient gains came from financials and consumer discretionary sectors, which rose 0.8 % and 0.6 % respectively, buoyed by a modest uptick in interest‑rate spreads. Energy stocks, on the other hand, slipped 0.4 % amid a rebound in oil prices, while industrials posted a modest 0.2 % gain.

In the United Kingdom, the FTSE 100 rose 0.3 % to 7,120, driven by gains in banks, industrials and energy. Germany’s DAX climbed 0.5 % to 13,500 points, led by significant lifts in the banking and automotive sectors. France’s CAC 40 gained 0.4 % as the banking and consumer goods segments pushed the index higher.

The day’s rally was also reflected in the bond markets: Euro government yields fell modestly, with the 10‑year yield sliding from 0.80 % to 0.70 %. This dip signalled a slight shift of risk appetite away from fixed‑income toward equities.

Fed Expectations Fuel the Rally

The key catalyst for the day’s upside was the growing consensus that the Fed will reduce its policy rate in the next policy meeting. Market participants have priced in a 25‑basis‑point cut at the Fed’s September 18 meeting, a departure from the current 5.25 % policy rate that has been in place since March 2024. The expectation of a Fed cut is already reflected in the U.S. Treasury markets, where the 10‑year yield has fallen to 4.5 %, signalling a shift toward riskier assets.

Reuters analysts noted that a Fed cut would likely lower borrowing costs globally, support corporate earnings and lift commodity prices, all of which could feed through into European equities. “The market’s risk appetite is now being driven by U.S. monetary policy expectations rather than European fundamentals,” said an analyst at J.P. Morgan. “That explains why we see a broad‑based rally in the MSCI Europe index.”

The expectation also helped support the euro against the dollar, which rose from 1.079 to 1.085 during the trading day. A stronger euro is generally supportive of euro‑area stocks, especially exporters, and has helped underpin the performance of German and French companies.

Airline Stocks Slip

While most sectors enjoyed the Fed‑driven lift, airlines and travel‑related stocks fell 1.3 % on the day. Lufthansa’s shares fell 2.1 % to €11.20, British Airways’ parent company, Aviva, slipped 2.6 % to £5.30, and Air France‑KLM’s shares fell 1.8 % to €18.10. The fall was attributed to a combination of weaker travel demand, higher fuel costs and regulatory headwinds.

“Travel demand remains muted, and the higher fuel costs are eating into margins,” explained a market‑watcher at Goldman Sachs. “We’re seeing a disconnect between the general equity rally and the travel sector, which is still grappling with the aftermath of the pandemic and the new geopolitical environment.”

The airlines’ share price pressure was compounded by the fact that the European airline sector has been operating at a high cost base, with many carriers still adjusting to the new, more environmentally conscious regulatory framework. In particular, the EU’s “Fit for 55” package, which aims to cut greenhouse‑gas emissions by 55 % by 2030, will likely add to the cost burden for airlines that are already struggling with fuel prices.

Broader Implications

The mixed performance of the market indicates that while investors are optimistic about U.S. monetary policy, they remain cautious about sectors that are still vulnerable to macro‑economic headwinds. The rise in the MSCI Europe index suggests that European companies are likely benefiting from a more accommodative global environment, but the weak performance of airlines highlights the uneven recovery across the travel industry.

In addition, the euro’s modest strengthening against the dollar and the dip in EuroStoxx 600 yields could be interpreted as a sign that European investors are positioning for higher risk assets. However, analysts caution that the airline sector will likely remain under pressure until travel demand normalises and fuel prices stabilise.

What to Watch Next

Investors will be keenly watching the Fed’s policy statement on September 18, as it could confirm or revise the market’s expectations of a rate cut. A surprise decision—either a more aggressive cut or a decision to hold rates—could have a significant impact on European equities. Meanwhile, the airline sector will be monitored closely for signs of easing travel restrictions and a gradual uptick in passenger numbers, as well as for any further regulatory changes that could affect operating costs.

In summary, European shares rallied on the back of Fed‑rate‑cut expectations, signalling broader confidence in risk‑seeking sentiment, while airline stocks fell due to persistent challenges in the travel sector. This divergence underscores the heterogeneity of market reactions to global monetary policy changes and the ongoing uncertainty that remains in the travel and aviation industry.