Markets rally on rising Fed cut bets, Europe leads the gains

Equity markets are extending their recent gains today as investors grow increasingly confident that the U.S. Federal Reserve will cut interest rates in December alongside hopes that the end of the US government shutdown is near. Sentiment has brightened across global bourses, with the combination of softer U.S. economic data and a more dovish shift in rate expectations helping to underpin risk appetite. The latest ADP employment report, which has taken on added significance amid the ongoing U.S. government shutdown that has delayed official nonfarm payrolls, showed a notable cooling in private-sector job creation. That weakness has reinforced the view that the labour market is losing momentum and that inflationary pressures should continue to subside, providing cover for the Fed to ease policy next month.

Markets continue to price in a 65% chance of another 25bps cut in December, even as Powell emphasized at the last FOMC meeting that it is not a “foregone conclusion. This setup has helped equities retain the upside momentum as they view his warning as a way of giving the central bank optionality, rather than an outright negation that further cuts will happen.

With multiple Fed officials scheduled to speak today, investors will be parsing every comment for clues about how divided the Committee may be. A few hawkish remarks could temporarily temper expectations, triggering a pullback in equities. Conversely, if policymakers emphasize the need to support growth amid deteriorating data, the dovish momentum could build further.

In essence, the buoyant tone reflects a delicate balance between optimism and uncertainty. The narrative driving equities is one of policy relief, a belief that the next move by the Fed is down, but with enough ambiguity to sustain volatility in the days ahead. As markets trade higher on the prospect of easier monetary conditions, the key question is whether forthcoming data will validate those expectations or challenge them, setting the stage for potentially sharp repositioning into year-end.

S&P 500 daily chart

Past performance is not a reliable indicator of future results.

Meanwhile, Europe is taking the lead for another session. Aside from the relief of a possible end to the US government shutdown spilling over, there is a cyclical rotation going on, where investors are moving away of big tech and defensive names, and into banks, leisure, and energy stocks. This is benefiting the European stock market, which also attracts investors looking for regional differentiation after heavy exposures to US tech.

This setup is likely to continue benefitting European stocks, which are still trading at a discount to many US counterparts. The eventual unlocking of the US government shutdown will likely offer another round of upside for US stocks, which will spill over to Europe and Asia. However, the markets could be in for a shock when the build-up of data gets released, possibly rocking market confidence a little bit if paints a worse picture than anticipated.

STOXX 600 daily chart

Past performance is not a reliable indicator of future results.