European Business Magazine Weekly Digest

U.S. Markets Surge Following Republican Victory

U.S. stocks saw a strong rally this week as investors reacted positively to Republican victories in both Congress and the White House. This "red sweep" has spurred optimism around expected pro-growth policies, including potential tax cuts, regulatory easing, and other economic measures aimed at stimulating corporate growth. Leading the charge was the small-cap Russell 2000 Index, which surged 8.57% for the week, though it remains 2.41% below its November 2021 peak. The S&P 500 also posted a robust 4.66% gain, marking its strongest weekly performance in a year and reflecting investor confidence in a favorable earnings outlook and anticipated policy shifts to fuel economic expansion.

In a recent webinar, T. Rowe Price's Chief U.S. Economist, Blerina Uru?i, discussed the potential economic implications of a Trump administration, noting that proposed immigration restrictions and higher tariffs could increase inflationary pressures, though policy specifics remain unclear. Uru?i also suggested that a stronger dollar, alongside tax cuts and deregulation, could mitigate some inflation, potentially creating a positive near-term environment for economic growth.

Federal Reserve Announces Rate Cut to Support Stability

The Federal Reserve took action this week with a 25-basis-point rate cut, its first since September, aimed at supporting economic stability amid these political shifts. Fed Chair Jerome Powell reaffirmed the central bank's independence, emphasizing that decisions will continue to be driven by economic data rather than anticipated fiscal policies. In response to these changes, U.S. Treasury yields generally trended lower, with the rate cut particularly impacting intermediate- and long-term yields.

European Markets Decline Amid U.S. Trade Concerns

European markets faced headwinds this week, with the pan-European STOXX Europe 600 Index dropping 0.84% as investor concerns grew over potential shifts in U.S. trade policy. Major indexes across Europe, including Italy’s FTSE MIB (-2.48%), France’s CAC 40 (-0.95%), and Germany’s DAX (-0.21%), also recorded declines as uncertainty around potential U.S. tariffs weighed on sentiment.

In response to the region’s slow growth and inflation concerns, European central banks took action. The Bank of England cut its key rate by 0.25 percentage points to 4.75%, with Governor Andrew Bailey hinting at possible further reductions if economic data continues to weaken. Sweden’s Riksbank also reduced its key rate to 2.75% and signaled a readiness to make additional cuts should the economic outlook remain challenging.

The Eurozone's revised Purchasing Managers’ Index (PMI) for October rose slightly to 50, suggesting flat rather than contracting economic activity. The services sector showed modest growth, while manufacturing contracted more slowly than anticipated. However, business confidence in the Eurozone reached its lowest point of the year, underscoring continued economic concerns.

Asian Markets: Mixed Results Amid Policy Shifts

Asian markets showed mixed but generally positive trends, particularly in Japan and China. Japan’s Nikkei 225 and TOPIX indexes rose 3.8% and 3.7%, respectively, as the Fed’s rate cut and optimism for stable U.S.-Japan trade relations boosted investor confidence. Despite some uncertainties due to a stronger yen, Japan's Chief Currency Official, Atsushi Mimura, signaled readiness to address potential volatility. Analysts expect the Bank of Japan (BoJ) may consider a rate hike as early as January 2025, given signs of robust economic activity.

Japan's recent economic data, however, painted a cautious picture: real wages fell by 0.1% year-over-year in September following a 0.8% decline in August, indicating limited consumer spending power. Nominal wages increased by 2.8% but were outpaced by inflation at 2.9%, while household spending dropped by 1.1%, against expectations of a 2.1% decline, reflecting ongoing challenges in boosting domestic demand.

In China, stock markets surged on news of new stimulus measures aimed at managing local government debt. The Shanghai Composite Index climbed 5.51%, while the CSI 300 rose by 5.5%, reflecting optimism over reduced financial risks. China's top legislative body, the Standing Committee of the National People’s Congress, approved a RMB 10 trillion refinancing program and raised the debt ceiling to RMB 35.52 trillion. Finance Minister Lan Fo’an also pledged enhanced fiscal support for 2025 to sustain economic growth amid global uncertainties.

Conclusion

Overall, global markets are adapting to significant political and economic shifts, with investors closely watching the potential impacts of U.S. policy changes on both domestic and international economies.