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A look at the upcoming trends in European and global markets reveals significant shifts fueled by recent monetary policy adjustments. After several central banks, including Switzerland and Canada, implemented substantial rate cuts, the U.S. dollar experienced a notable surge. It rose by 1% against the euro, 1.6% against the Swiss franc, and 1.8% against the Japanese yen.
This strengthening of the dollar can be attributed to increasing U.S. Treasury yields as market participants moderate their expectations for aggressive policy easing from the Federal Reserve in the coming year. Although a rate cut is highly anticipated at the Fed’s next meeting, expectations of another cut in January have diminished sharply, with current assessments indicating only a 20% likelihood.
Compounding this market scenario is the looming influence of U.S. President-elect Donald Trump. By the time the Federal Reserve convenes again, he will have likely issued numerous executive orders that could significantly affect trade policies and economic strategies.
The robust performance of the dollar has put pressure on currencies in emerging markets, restricting their ability to implement policy easing measures. The Indonesian rupiah recently plummeted to its lowest level in four months, prompting the central bank to intervene in the foreign exchange market multiple times to stabilize the currency.
Similarly, India’s central bank is believed to be actively selling dollars through state banks to bolster the rupee, which is perilously close to historical lows.
The Japanese yen is also struggling, largely influenced by market speculation that the Bank of Japan may refrain from raising interest rates in the near future. Concerns regarding wage stagnation among small enterprises add to the cautious sentiment surrounding potential monetary tightening.
Another noteworthy aspect affecting U.S. Treasury yields and the dollar’s strength is the recent Producer Price Index (PPI) data release, which was skewed upward primarily due to rising egg prices. However, the core PPI showed more stability, prompting analysts to revise downward their projections for the critical core Personal Consumption Expenditures (PCE) index, adjusting it from above 0.2% to around 0.13%.
This week, long-term Treasuries have experienced considerable declines, with the yield of the benchmark 10-year bond climbing 17 basis points and the 30-year yields soaring 22 basis points—the steepest weekly increase in over a year.
Part of the blame for this shift lies with lackluster results from a 30-year bond auction on Thursday, although the overall increase in yields reflects a broader reassessment of terminal rates. Current expectations suggest U.S. rates will gradually decrease to 3.8% by the end of 2025, a rate considerably higher than the anticipated 1.75% for Europe and 2.7% for Canada.
In Asia, the stock markets are predominantly in decline, with China notably leading the downward trend. Expectations had been elevated ahead of China’s Central Economic Work Conference in Beijing, following a Politburo meeting that indicated a shift to a “moderately loose” monetary policy stance—the first significant change in 14 years. However, the conference yielded no concrete measures, leaving investors somewhat disillusioned.
Looking ahead, markets in Europe are bracing for a lower opening, with attention directed towards a variety of secondary economic indicators, including the UK’s monthly GDP figures and industrial production data from the eurozone. EUROSTOXX 50 futures indicated a drop of 0.3%, while Nasdaq futures saw a slight increase of 0.3%, remaining near record levels.
Several officials from the European Central Bank are scheduled to speak later in the day. Following the ECB’s decision that disappointed some members hoping for more aggressive cuts, market expectations are now leaning towards a quarter-point reduction at each policy meeting until at least mid-next year.
Key developments that could shape market dynamics on Friday include:
- UK monthly GDP data
- Euro zone industrial output
- U.S. import prices data
- Comments from Portugal’s central bank governor Mario Centeno
Source
finance.yahoo.com