European stocks climbed on Tuesday, while the U.S. dollar remained subdued as investors anticipated the start of an easing cycle by the Federal Reserve. The central bank is widely expected to announce a significant rate cut during its policy decision on Wednesday.
Market sentiment has increasingly leaned toward a larger cut, with futures markets now reflecting a nearly 70% probability of a 50-basis-point reduction, up from just 15% last week. This shift follows a series of media reports suggesting that the Fed may opt for a more aggressive approach to rate easing. As a result, riskier assets have gained ground, while the dollar and bond yields have been pushed lower.
“The market is pricing in the expectation of a ‘Fed put,'” said Eddie Kennedy, head of bespoke discretionary fund management at Marlborough Investment Management. “Investors are anticipating a soft landing, and the Fed’s transparency regarding a rate-cutting environment has generally been positive for stocks in the past.”
The pan-European STOXX 600 rose 0.5% to a two-week high, with Germany’s DAX, Britain’s FTSE 100, and France’s CAC 40 gaining between 0.3% and 0.7%. In Asia, MSCI’s broad index of Asia-Pacific shares increased by 0.6%, while futures for both the S&P 500 and Nasdaq showed modest gains.
Neil Shearing, group chief economist at Capital Economics, suggested that a 50-basis-point cut might be considered if the Fed believes that keeping rates too high for too long could pose risks to the economy. However, Shearing noted that starting the easing cycle with such a significant cut could be seen as an admission that the Fed has fallen behind the curve.
For the year, markets are pricing in roughly 120 basis points of rate cuts by December. U.S. Treasury yields continued to reflect these expectations, with the two-year yield at 3.5527% after touching a two-year low of 3.528% in the previous session. The benchmark 10-year yield remained stable at 3.6157%.
Global Central Banks in Focus
The Bank of England (BoE) and the Bank of Japan (BOJ) are also meeting this week to discuss their respective monetary policies. Both central banks are expected to maintain current rates. However, the BoE’s more cautious approach to rate easing, compared to the Fed, has lent support to the British pound, which remained near its highest level since March 2022.
In Japan, the yen has strengthened due to falling U.S. Treasury yields and expectations that the BOJ may tighten policy further in the future. This has led to concerns about the impact on Japanese exporters, causing the Nikkei index to drop by 1% as markets reopened following a national holiday.
China’s Economic Outlook and Commodity Prices
In Asia, China’s economic slowdown continues to affect market sentiment. Recent data showed that industrial output growth in China slowed to a five-month low in August, with retail sales and new home prices also weakening.
However, concerns over reduced Chinese demand for oil were balanced by the ongoing impact of Hurricane Francine on U.S. oil production in the Gulf of Mexico. Brent crude futures remained steady at $72.58 per barrel, while U.S. crude futures were flat at $70.04 per barrel.
Meanwhile, spot gold remained unchanged at $2,582.52 per ounce, reflecting cautious investor sentiment ahead of the Fed’s rate decision.
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