Source: Yahoo Finance

Challenges in Europe

Europe’s economic landscape remains burdened with challenges, with fears of political instability adding to a growing list of concerns. A major source of unease is the geopolitical situation, particularly surrounding the policies of former U.S. President Donald Trump, whose potential return to power raises questions about future support for Ukraine and broader trade policies that could further strain global alliances.

Germany, the European Union’s largest economy, continues to underperform. It faces weak industrial output and an absence of decisive reforms to enhance competitiveness. The Bundesbank has again revised its 2024 economic growth outlook downward to a mere 0.2%. This economic stagnation is compounded by political instability too, as Chancellor Olaf Scholz’s government has collapsed and will be followed by snap elections.

Similarly, France faces political upheaval following the appointment of a new prime minister after a no-confidence vote toppled the previous government. Even more, the two biggest EU economies, Germany and France, are currently struggling to lead the bloc toward greater economic competitiveness. This stagnation not only leaves Europe vulnerable but also spills over to global economies and their stock markets.

Monetary and Fiscal Tensions in the U.S.

Across the Atlantic, U.S. markets are closely monitoring the Federal Reserve’s next moves. The U.S. economy has shown resilience, with a 3.1% annualized growth rate in the summer and robust consumer spending. However, the Fed has taken a cautious stance, signaling limited interest rate cuts in 2025. Many traders now expect only one or two rate cuts next year, down from earlier hopes for a more aggressive easing cycle.

This recalibration has created turbulence in stock markets, pushing them downward. Yields on U.S. Treasuries rose sharply, with the 10-year yield climbing to 4.57%, the highest level since May.* As Wall Street typically welcomes rate cuts, the Fed’s reluctance underscores concern about inflation, even as the labor market remains robust.

Adding to the uncertainty is a looming U.S. government shutdown, with the Republican-led House rejecting a temporary funding plan. Unless an agreement is reached, the shutdown will initiate on Saturday, potentially disrupting markets and broader economic stability even more.

Influence on Asian Markets

The negativity originating from Europe and the United States has spilled over into Asian stock markets, evidence of the connection of global economies via supply chains and international trade. This negative sentiment is likely to persist, as Asian markets remain sensitive to developments in Western economies.

Japan’s Nikkei 225 fell 0.3%, driven by negative sentiment and inflation concerns, as data showed core consumer prices rising 2.7% year-on-year in November, surpassing expectations. Despite this, the Bank of Japan maintained its ultra-loose monetary policy, holding its benchmark rate at 0.25%.*

Hong Kong’s Hang Seng Index managed a slight gain of 0.2%, going against the trend, while the Shanghai Composite dipped 0.1% after China’s central bank left its loan prime rates unchanged. Investors are betting on further monetary easing in China, as the one-year bond yield dropped to 1%, its lowest level since the 2008 global financial crisis. Meanwhile, South Korea’s Kospi saw the steepest decline, falling 1.3%, accurately reflecting the widespread regional selloff.*

* Past performance is no guarantee of future results.