All eyes turn to the Fed on Wednesday, where rising odds of a December rate cut have helped global equities regain momentum. Sharing her thoughts on what might lie ahead for markets and the global economy as the countdown to Christmas continues, Jemma Slingo, Pensions and Investment Specialist, Fidelity International comments:
“An end-of-term feeling is setting in. The papers are starting to publish their yearly roundups, and Santa hats are appearing on the London Underground. With more than three weeks left of December, however, there is still plenty going on in the markets – and the next few days could prove eventful.
Waiting game
“The biggest moment of the week will likely come on Wednesday, when the Federal Reserve will announce its final interest rate decision of 2025. There has been a lot of speculation about this. For a long time, investors were convinced that there wouldn’t be a third cut this year. Towards the end of November, however, they changed their minds, and the chance of a rate cut now stands at roughly 87%.
“This has had a knock-on effect on the stock market. After falling sharply in the first half of November, the S&P 500 has recovered its poise, fuelled by the prospect of lower borrowing costs. UK and European equities have also started the week on firmer footing.
“It’s not just US interest rates that are attracting attention, however – Japan is also under scrutiny. The country is braced for an interest rate rise later this month after years of negative rates. This has prompted a sell-off in the country’s bonds and 10-year government bond yields – which move inversely to prices – are at their highest level since the financial crisis.
“Japan may be thousands of miles away, but global bond markets are shifting in response. This has been described as a ‘butterfly effect’. Events in Japan have also been blamed for movements in speculative assets like bitcoin, which tend to suffer when investors can get better yields from safer assets.
Looking ahead to 2026
“Predictions for 2026 have already started to trickle in, but the coming days are likely to bring plenty more. Assuming no disasters in the next three weeks, 2025 has been a strong year for stock markets, with everything from the FTSE 100 to emerging markets posting double-digit gains.
“There is plenty of optimism around 2026 too. Market forecasts suggest the S&P 500 could climb meaningfully from current levels next year, with some expectations reaching around the 7,500 mark.
“Meanwhile, analysts think companies in the Stoxx Europe 600 could grow their earnings by 12% next year, helped by German fiscal stimulus, which could translate into an 11% rise in the index.
“For all the apparent cheer, however, investors in the UK are behaving nervously. Equity funds saw substantial withdrawals last month, with much of that money redirected into cash, making November the second worst month on record. Worries about an AI bubble in North America are clearly weighing heavy.
Home turf
“Concerns about the domestic economy may also be affecting behaviour – markets are currently pricing in another rate cut on 18 December, but the MPC has rarely looked more divided.
“A UK GDP estimate for October will also be published on Friday. The Bank of England is forecasting headline growth of 0.3% for the full fourth quarter, but analysts are concerned October may be a damp squib.”
