Euro area industrial production fell 1.5% month on month in January, despite stronger manufacturing PMIs and improved German new orders. The decline was mainly due to pharmaceuticals and energy-intensive industries.
Pharmaceutical output dropped 16% month on month, reaching its lowest level since mid-2024. This accounted for about two-thirds of the overall fall, after earlier support from higher exports to the US around “Liberation Day”, and while demand for weight-loss drugs stayed strong.
Energy-intensive industries fell 3.4% month on month to a record low since 2009. Output is about 13% below pre-Ukraine-war levels, with added pressure from oil and LNG price swings linked to the conflict in Iran.
German fiscal stimulus, AI-related capital spending, a housing upturn and steady consumption are expected to support a wider recovery. US tariff effects are described as largely absorbed, with output expected to move back in line with rising domestic demand over time.
The sharp drop in January’s industrial production was a surprise, especially after the modest recovery we saw in the second half of 2025. This backward step is at odds with improving sentiment, like the latest February 2026 flash manufacturing PMI which just came in at 50.8, its third month of expansion. This creates uncertainty, suggesting that volatility, as measured by indices like the VSTOXX, may rise, making options strategies attractive.
We need to look at the details, as two sectors are responsible for most of the weakness. The massive 16% monthly fall in pharmaceuticals seems like a one-off correction after its strong export performance in 2025, and a rebound is very likely. This temporary dip could present an opportunity for buying short-dated call options on major European pharmaceutical stocks or healthcare-focused ETFs.
On the other hand, energy-intensive industries continue to suffer, hitting their lowest production levels since the 2009 crisis. With Brent crude prices hovering around $95 a barrel due to persistent geopolitical tensions, this sector will probably continue to underperform in the medium term. This makes the sector a candidate for bearish positions, perhaps through put options or by shorting industrial metals futures.
Despite these pockets of weakness, the broader outlook for a cyclical recovery remains intact. We see support from the German fiscal stimulus that started to take effect late last year, rising investment in AI infrastructure, and resilient consumer spending. Therefore, using the weak headline industrial number to place large bearish bets on broad indices like the Euro Stoxx 50 seems premature.
The best approach in the coming weeks is to trade the divergence between sectors instead of making a single bet on the market’s direction. We expect industrial output to eventually align with the healthier domestic demand that has been building since last year. This environment favors pair trades, such as going long on technology and consumer discretionary sectors while taking a short position against the energy-intensive materials sector.
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