European equity markets closed lower on Friday as investors digested fresh inflation data from the EU and U.S., while concerns mounted over a potential windfall tax on UK banks.
The pan-European Stoxx 600 slipped 0.6%, with major national indexes following suit:
FTSE 100 (UK): down 0.3%
CAC 40 (France): off 0.8%
DAX (Germany) and MIB (Italy): both down 0.6%
In France, consumer price inflation eased to 0.8% in August from 0.9% in July, slightly below forecasts, driven by lower energy and manufactured goods prices. However, food and services inflation remained elevated at 1.6% and 2.1%, respectively.
Germany posted a contrasting trend, with inflation rising to 2.1% in August from 1.8% in July, surpassing expectations.
Across the Atlantic, the Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, matched forecasts with an annual rise of 2.6%, while core inflation held at 2.9%.
The figures come just a week after Fed Chair Jerome Powell delivered a dovish-leaning speech, fueling speculation of a September rate cut. According to CME’s FedWatch tool, traders are pricing in an 87% probability of a cut next month.
UK lenders were among the session’s biggest losers:
NatWest: down nearly 5%
Barclays: fell 2.8%
Lloyds: slipped 1.2%
The sell-off followed a report by the Institute for Public Policy Research (IPPR) urging the government to impose an additional levy on banks’ “windfall profits” generated from higher interest rates and bond purchases by the Bank of England.
Such a move could appeal to UK Finance Minister Rachel Reeves, who is seeking revenue to strengthen public finances ahead of the autumn budget. However, analysts warn that introducing new taxes could prompt banks to tighten lending, potentially hindering economic growth.
Citi analysts noted that while an increase in the UK bank tax cannot be ruled out, the government is likely to explore other fiscal tools first. They also highlighted that any targeted tax on banks’ reserve returns would be complex and could push lenders toward riskier assets.
Defense stocks outperformed, with German firms Hensoldt and Renk rising 3% and 5%, respectively, while Rheinmetall gained 3.2%, amid ongoing geopolitical uncertainty.
Despite recent volatility, the Stoxx 600 is on track for a 0.7% monthly gain in August, marking its second consecutive positive month since February.
In corporate news, Remy Cointreau cut its forecasted impact from U.S. tariffs to €20 million, down from €35 million, after a new EU-U.S. trade agreement set baseline duties at 15%.
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