European equities closed out a turbulent week in the red, as escalating Middle East tensions, sticky inflation and the prospect of further monetary tightening overshadowed a late-session rebound led by Volkswagen.

The benchmark Stoxx 600 edged up 0.1 percent on Friday to settle at 649.88 points, but the modest gain was not enough to erase a weekly decline of 0.8 percent. The pan-European index had traded lower for much of the day before corporate headlines and easing oil prices helped it recover into the close.

A surprisingly resilient US non-farm payrolls report shaped Friday’s trading, signaling continued stability in the American labor market and reinforcing expectations that the Federal Reserve could raise interest rates later this month. Investors are now looking to next week’s US consumer inflation data for a clearer read on the central bank’s trajectory.

“Fed chairman Warsh’s decision to look past labor-market softness at Jackson Hole and focus on inflation has been vindicated and this report gives the Fed more ammunition to tighten in September,” said Eric Merlis, managing director and co-head of global markets at Citizens.

The prospect of higher US rates has added another layer of pressure to global equities just as European economies grapple with sluggish growth and rising energy costs. Brent crude traded around $96 a barrel and was on track for its steepest weekly gain since mid-July, a development that carries outsized weight for a region heavily reliant on energy imports.

Volkswagen Leads Autos Higher

Volkswagen jumped 5.9 percent to hit a two-month high, topping Germany’s DAX index after the supervisory board of Europe’s largest automaker struck a turnaround agreement that averted an escalation with unions and shareholder Lower Saxony. The broader European autos index gained 1.1 percent, lifted by the rally.

The automaker faces pressure from US import tariffs, a stagnant European market and aggressive Chinese rivals that have all hurt its margin and hammered the stock. Despite Friday’s gain, its shares are down 22 percent so far this year.

“Investors have a habit of applauding major cost cutting exercises, yet there is always the risk that the respective company is cutting too close to the bone and leaves itself short of resources should demand pick up,” said Dan Coatsworth, head of markets at AJ Bell.

Fiona Cincotta, senior market analyst at City Index, struck a similarly cautious tone. “It definitely is a move in the right direction but it’s going to take more than just this announcement for us to see a really sustained share price recovery,” she said.

European banking stocks fell 0.7 percent, reversing some of their recent strong gains after comments from Federal Reserve Governor Christopher Waller on Thursday eased concerns about a tighter monetary policy. “His comments just helped the markets rein in Federal Reserve rate hike expectation,” Cincotta added.

ECB Decision in Focus

Attention now shifts to the European Central Bank’s policy meeting next week, where a 25-basis-point rate hike is widely anticipated. JPMorgan and BNP Paribas said they expect the ECB to deliver another 25-basis-point rate hike in December, citing elevated energy prices as strengthening the case for further tightening.

The weekly slide was fuelled by escalating conflict in the Middle East, which sent crude prices higher and added to investor concerns over sticky inflation, rising government debt and prolonged central bank tightening. With European economies vulnerable to rising oil prices because of their reliance on energy imports, the combination of geopolitical risk and hawkish central bank signals has left investors with little room for optimism heading into the autumn.

IndexFriday CloseDaily ChangeWeekly ChangeStoxx 600649.88+0.1%-0.8%DAXN/A-0.1%N/AFTSEN/A-0.2%N/ACAC 40N/A-0.2%N/A

Note: Daily changes for DAX, FTSE and CAC 40 reflect intraday levels as of 0838 GMT on Friday; weekly changes were not reported for these indices.