European markets faltered on Tuesday, while the dollar remained strong as investors prepared for a series of central bank meetings expected this week. The U.S. Federal Reserve is anticipated to announce a rate cut, while the Bank of Japan is likely to maintain its current stance.
The pan-European STOXX 600 dipped 0.5%, reaching a two-week low. Germany’s DAX, France’s CAC 40, and Britain’s FTSE 100 each fell between 0.1% and 0.7%.
“There’s little to inspire confidence in Europe,” noted Lars Skovgaard, senior investment strategist at Danske Bank, pointing to weak economic data. “While U.S. equities are receiving gifts, Europe seems to be left out for now.”
U.S. markets have significantly outperformed their European counterparts this year. The Nasdaq reached a new record high on Monday, while the S&P 500 has surged 27% in 2024, compared to the STOXX 600’s modest 7% gain.
In Asia, Japan’s Nikkei 225 slipped 0.2%, and South Korea’s Kospi dropped 1.3%, pushing its annual losses beyond 7%, making it Asia’s worst-performing market in 2024. The South Korean market has been under pressure amid political upheaval, as President Yoon Suk Yeol was impeached and suspended on Saturday following a failed attempt to impose martial law.
Central Banks in Focus
Bitcoin hovered near its all-time high of $107,821, reached on Monday, trading last at $107,346. The cryptocurrency market has seen a sharp rally since the U.S. election in November, driven by optimism that a Trump administration will introduce more favorable regulations.
A packed week of central bank meetings includes decisions from the United States, Japan, the UK, Sweden, Norway, Indonesia, and Thailand. While the Bank of Japan, Bank of England, Norges Bank, and Bank of Thailand are expected to hold rates steady, Sweden’s Riksbank is likely to announce a rate cut. In contrast, Bank Indonesia is projected to hike rates to stabilize the rupiah, which remains near its four-month low.
The Federal Reserve will take center stage, with markets widely expecting a 25-basis-point rate cut on Wednesday. Investors will closely scrutinize projections for 2025, which currently suggest a further 45 basis points of easing—equivalent to one quarter-point cut and a strong likelihood of a second.
Charu Chanana, chief investment strategist at Saxo, noted that markets are bracing for the possibility of a “hawkish cut.” “While the Fed may cut rates, signals of caution regarding the pace of future cuts could emerge through the updated dot plot or Chair Powell’s press conference,” Chanana explained.
The previous dot plot forecast four rate cuts (100 basis points) for 2025, but this could be revised to just two or three as inflation risks persist.
The dollar index, which tracks the U.S. currency against six major peers, rose 0.2% to 106.99 and is on track for a 5% annual gain. The yen traded at 153.84 per dollar, after hitting a three-week low on Monday, as expectations for a BOJ rate hike this week remain slim.
Elsewhere, the euro hovered at $1.0490, set for a near 5% drop in 2024, while the pound edged up 0.1% following stronger-than-expected pay growth data through October. “The figures bolster the Bank of England’s cautious and gradualist approach as we enter 2025,” said Sanjay Raja, chief UK economist at Deutsche Bank, who expects the BoE to hold rates steady on Thursday.
Commodities and Oil
Oil prices softened as concerns about Chinese demand weighed on markets ahead of the Fed’s decision. U.S. West Texas Intermediate (WTI) crude dropped 1% to $70.04 per barrel, while Brent crude futures fell 0.8% to $73.34 per barrel.
Spot gold slipped 0.2% to $2,647 per ounce but remains on track for a 29% gain in 2024, marking its best year since 2010.
