European stocks have been popular among investors recently, but it wouldn't take much for sentiment to turn negative once more.‍Euro-area stocks have experienced a 10% increase in January, making it the best start to a year yet. However, prominent investors such as BlackRock Inc. and Amundi SA have cautioned that markets may be too optimistic about potential risks in the future.

The euro has fallen below parity with the US dollar in recent months, but has recovered somewhat to trade at just above $1.07 on Wednesday morning. The euro's weakness last year was largely due to the aggressive monetary policy tightening from the U.S. Federal Reserve, while the European Central Bank was much slower in hiking interest rates to contain inflation.

Inflation in the euro zone dropped for a second consecutive month in December, according to preliminary data from the European statistics agency, Eurostat. Headline inflation, which includes food and energy costs, came in at 9.2% year-on-year in December. Inflation rates in November contracted slightly for the first time since June 2021, representing a headline inflation rate of 10.1%. This is a positive sign for the economy, as it indicates that prices are beginning to stabilize after months of increases.

Investors are preparing for European governments, led by Germany, to issue a large amount of new debt next year as they spend heavily to protect their economies from high energy costs.