Will European Stocks Rally in 2025?

Economic

Stocks

Summary:

Goldman Sachs Research expects European stocks to rally in 2025 even as the region faces headwinds from political and trade uncertainty and slow economic growth.

The STOXX 600 index, made up of European and UK companies, is forecast to generate a total return of about 9% next year (as of 19 November 2024) — which is modestly lower than Goldman Sachs Research’s projections for the index's US and Asian counterparts.

We sat down with Goldman Sachs Research senior strategist Sharon Bell to discuss the Europe equity strategy team’s outlook for stocks in 2025. The report, which is titled “2025 Outlook: Peer Pressure,” shows that the team slightly lowered their forecasts for the STOXX 600 for next year. At the same time, Bell points out that European stocks may benefit from cooling inflation, a larger than expected European policy response, or concerns about the prospect for returns from mega-cap US stocks.

Why did the team downgrade its STOXX 600 target prices for the next year?

We’re below consensus on growth: We’ve downgraded our economic figures and our earnings expectations for Europe in the last few months. Given all of that, we’ve also downgraded our price targets very slightly.

Europe has also seen a modest rise in risks. The stability of the fiscal situation in France, Italy, and to some extent the UK, is being questioned, for example. Economic data has been weak, and the manufacturing cycle, which particularly impacts Germany, has been really dire.

The news is not recessionary — it’s nowhere near as bad as what we saw in the financial crisis, the sovereign crisis, or the pandemic — and that’s why it’s a small downgrade. But there is undoubtedly an accumulation of risks along with weaker growth.

What sectors are you optimistic about?

We anticipate that the European Central Bank will bring interest rates down to 1.75% by the middle of next year (from 3.25% in October). Lower interest rates ought to create some opportunities in more indebted sectors like telecoms, and in areas that are sensitive to interest rates, like real estate.

We also expect consumer-facing areas — like retailers and travel companies — to be a bit more robust, because they benefit both from interest rates coming down and also from the fact that they’re not exposed to trade concerns and tariffs, because they’re catering to a more domestic consumer in Europe.

Do lower rates also benefit smaller companies rather than bigger ones?

These companies tend to be more indebted, and to have more floating debt. So interest rates coming down would help them a lot. We also expect M&A activity to pick up — we’re already seeing signs of that coming through. That also tends to help the small- and mid-sized companies, because they’re more likely targets of acquisitions.

Given rates coming down and M&A activity picking up, one would expect small- and mid-caps to do well. The only problem is that they are also cyclical — they’re very sensitive to economic growth, which remains very weak. We haven’t made a strong call for mid-caps, but I can certainly see the positive case for them at the moment.

How might exchange rates impact European stocks?

With all other things equal, lower interest rates will push down European currencies. It’s fair to say that the euro has already come down relative to the dollar, reflecting the weaker economic environment in Europe, and the stronger one that we’ve seen in the US recently.

Normally, a falling domestic currency benefits local companies, who often make some of their money outside of Europe in dollars or other currencies, and end up making more money when they convert that back into euros. This is part of the reason why companies aren’t too worried about the decline in currency — because it makes their business more competitive, for one thing.

If the euro is falling, companies with euro-area costs will also see those expenses coming down relative to companies with dollar costs. So from a competitiveness angle, the currency coming down is a good thing.

However, I don’t think it actually benefits equities overall. If you look at periods when the euro has been weak (or when sterling has been weak, in the case of the UK market), they have been associated with weaker equities. And one of the reasons is that equities are a very risk-sensitive asset. Why are currencies coming down? It’s normally either because of a risk event like a sovereign problem (as in the case of France recently), or because people are very worried about economic growth. Neither of those is likely to benefit equities.

A falling euro also discourages foreign investors from buying European equities. US investors are a large player in European stocks, and if they believe that they are going to lose on the currency fallout, then they will be put off from investing more.

In terms of economic performance, which region is most important for European companies: the US, the EU, or China?

We often ask this exact question: What matters more for Europe? We have a weak view on European growth, but we have an above consensus view on the US, and we think that China will see a stimulus that helps growth next year.

Most of European companies’ sales are to Europe. But that component — sales to Europe — hasn’t been growing at all in the last twenty years. All of European companies’ growth has come from sales to China and the US. So Europe is very reliant for its growth on those regions.

We like companies with US exposure for a couple of reasons: one is that they are exposed to a stronger economy, so over time they should get better sales and earnings; another is that they are dollar earners, by definition, and so they should benefit from a stronger dollar; and finally, in Europe, corporate taxes are generally going up, whereas in the US you may even see some taxation benefit.

The fear for these companies is that they may see higher tariffs if they’re exporters from Europe. But in the vast majority of cases, these companies are not exporters, but they have US businesses — with US assets, employees, and sales.

How do you think lower interest rates and inflation will impact European stocks?

Lower interest rates would be the most positive scenario for European companies. They stimulate better economic growth, which feeds through to better earnings. I am skeptical that that will be the case, though. I think the European Central Bank is in a cutting cycle, but a relatively cautious one — reflecting the fact that there are pockets of inflation that still look quite sticky in Europe.

That being said, because we’re below consensus on growth, we think that both growth and inflation will be a bit weaker next year. And lower inflation has historically been associated with higher valuations for the market. This is an upside we’re not totally taking into account in our target prices. We’re saying valuations will remain roughly the same over the next year, but we expect a rise in earnings. But what if we have much lower inflation, and that drives higher valuations?

Valuations can reach as much as 15- or 16-times price divided by earnings, and at the moment we’re only on 13 or 14 for Europe. So we could see a higher valuation for the European equity market, reflective of lower rates and a lower inflation environment. That’s not our core view, but it is an upside risk.

How has the strong performance of US equities impacted European stocks?

The US market has done extremely well over the last year. In fact, it has outperformed relative to Europe over any time period you choose to take, really — the last month, the last three months, the last six months, the last year, and even the last few years. And there have been a lot of fund flows into the US recently, whereas there’s not been very much allocation into Europe.

The question is: Could that reverse? We’ve had an absolutely stellar rally in the US, particularly since the election. And I think the concern is that the US looks vulnerable, given its high valuation. Could that make Europe more interesting? I’m getting a lot more questions about that.

I think Europe is an interesting market, and there are many things that could help it reverse its underperformance versus the US, but none of them are our core view: more significant policy easing, a peace deal in Ukraine, or an improvement in manufacturing in Germany, for example.

The other thing that would help Europe outperform would be something going wrong in the US in some way — either economically or with some of the largest companies. The biggest American technology companies used to be capital-light businesses, but now they’re spending a lot of money on capital investment. If people start questioning the returns on that investment, then the valuations could come down, which could benefit European stocks on a relative basis.

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Korea's financial authorities said on Friday they would loosen foreign exchange regulations and allow more corporate borrowings abroad, in a bid to defend the won that is trading at a 15-year low with improved liquidity.

"Strict regulations restrain the efficiency of foreign exchange management, and there is a need to take into account worsened foreign exchange liquidity conditions after recent events," the finance ministry said in a joint statement with the central bank and regulatory agencies.

The Korean won dropped on Thursday to its weakest level in 15 years, weighed down by risk-averse sentiment after the U.S. Federal Reserve's cautious stance on more interest rate cuts, as well as domestic political uncertainty stoked by President Yoon Suk Yeol's short-lived martial law order on Dec. 3 and his subsequent impeachment.

According to the statement, measures include allowing companies to take out loans in foreign currencies and exchange the funds for the won, if they are used for investing in facilities such as equipment, property and land purchases.

"It is a paradigm shift in foreign exchange policy, from regulating external debt, to inducing more foreign inflows," a finance ministry official told Reuters by phone.

Traumatized by capital flight during the 1997-1998 Asian financial crisis and the 2007-2008 global financial crisis, Korea has had a tight grip on foreign exchange borrowings even as it has encouraged overseas investments.

At the end of September, the country held a record high of a net $977.8 billion in financial assets abroad, after turning a net creditor in 2014.

"We will continue to loosen regulations on capital inflows from the private sector unless it affects external debt or credit ratings in a negative way," the official, who did not wish to be identified because the person was not authorised to speak to media, said.

The ministry also said the ceiling of foreign exchange futures contracts would be raised to 75 percent of capital holdings for local banks and 375 percent for Seoul branches of foreign banks, from the current 50 percent and 250 percent, respectively.

"They are clearly tools for controlling the weakening pace of the local currency by easing the strain in foreign exchange liquidity," said Park Sang-hyun, an economist at iM Securities.

"But, there will be limitations, as unfavourable external conditions, from U.S. policy to China risks, are putting pressure on all emerging currencies, not just the won," Park said.

The ministry said it would implement the measures in a swift manner and consider expanding them after reviewing the effects. (Reuters)

Source: Koreatimes

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ACY

Economic

Central Bank

The Bank of England (BoE) decided to keep its interest rate at 4.75% during its most recent meeting, a move widely anticipated by markets. However, the real story lies in the voting dynamics of the Monetary Policy Committee (MPC), where a closer-than-expected 6-3 split has revealed an emerging dovish tone within the central bank. This subtle shift could pave the way for a significant policy change in 2025.

The Decision and Its Implications

The BoE’s decision to hold rates reflects a continued commitment to its data-driven approach. Policymakers remain cautious in their forward guidance, emphasizing flexibility and refraining from committing to any specific timeline for future rate cuts. This stance aligns with ongoing inflationary challenges, particularly sticky wage growth and elevated services inflation.

Yet, the three dissenting votes—favouring a 25-basis point cut—signal an internal debate about the appropriateness of the current monetary policy stance. These dissenters, including the recently appointed Alan Taylor, argue that the existing policy risks deviating too far from the BoE’s 2% inflation target and could unnecessarily widen the output gap, potentially stifling economic growth.

A Market Responds

The market reaction was swift. The dovish undertones of the MPC vote prompted a modest repricing of interest rate expectations. The two-year GBP swap curve shifted downward, reflecting increased probabilities of rate cuts as early as February 2025. Currency markets also felt the impact, with the pound losing ground against the dollar, while EUR/GBP showed less pronounced movement due to euro-specific bearish factors.

Bank of England Holds Rates Steady Amid Growing Dovish Momentum_1

This reaction underscores growing market anticipation that the BoE may adopt a more accommodative stance in the coming year, especially as economic data points to slowing activity.

Inflation vs. Growth: A Delicate Balancing Act

The BoE faces a challenging environment where inflation remains stubborn in certain sectors, even as broader economic indicators show signs of softening. Wage growth continues to outpace expectations, adding to inflationary pressures. However, the dissent within the MPC suggests that some members believe the focus should now shift toward preventing economic stagnation and supporting growth.

Bank of England Holds Rates Steady Amid Growing Dovish Momentum_2

This debate reflects a broader dilemma faced by central banks globally: how to strike the right balance between containing inflation and fostering sustainable economic momentum. For the BoE, the growing dovish sentiment may indicate that the pendulum is beginning to swing toward the latter.

What to Expect in 2025

Looking ahead, the BoE’s policy trajectory will remain heavily influenced by incoming data. The MPC’s emerging dovish tone suggests a greater willingness to consider rate cuts next year, particularly if economic activity continues to decelerate. While markets currently expect modest easing of around 55 basis points, some analysts, including ING, predict more substantial cuts totalling 150 basis points in 2025.

This potential policy shift highlights the importance of adaptability in a rapidly changing economic landscape. As the BoE navigates these complexities, its decisions will not only shape the UK’s economic outlook but also influence global financial markets.

The Bank of England’s latest decision may appear unremarkable at first glance, but the close vote and underlying sentiment reveal a central bank at a crossroads. As inflationary pressures persist and economic growth slows, the BoE’s evolving approach will be critical in steering the UK economy through a period of heightened uncertainty. For now, all eyes remain on February’s meeting, where the dovish momentum within the MPC may gain further traction.

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Economic

Commodity

SINGAPORE (Dec 20): Oil prices fell on Friday on worries about demand growth in 2025, especially in top crude importer China, putting global oil benchmarks on track to end the week down nearly 3%.

Brent crude futures fell by 41 cents, or 0.56%, to US$72.47 a barrel by 0420 GMT. US West Texas Intermediate crude futures fell 39 cents, or 0.56%, to US$68.99 per barrel.

Chinese state-owned refiner Sinopec said in its annual energy outlook, released on Thursday, that China's crude imports could peak as soon as 2025 and the country's oil consumption would peak by 2027 as diesel and gasoline demand weaken.

"Benchmark crude prices are in a prolonged consolidation phase as the market head towards the year end weighed by uncertainty in oil demand growth," said Emril Jamil, senior research specialist at LSEG.

He added that Opec+ would require supply discipline to perk up prices and soothe jittery market nerves over continuous revisions of its demand growth outlook. The Organization of the Petroleum Exporting Countries and allies, together called Opec+, recently cut its growth forecast for 2024 global oil demand for a fifth straight month.

Meanwhile, the dollar's climb to a two-year high also weighed on oil prices, after the Federal Reserve flagged it would be cautious about cutting interest rates in 2025.

A stronger dollar makes oil more expensive for holders of other currencies, while a slower pace of rate cuts could dampen economic growth and trim oil demand.

JPMorgan sees the oil market moving from balance in 2024 to a surplus of 1.2 million barrels per day (bpd) in 2025, as the bank forecasts non-Opec+ growth increasing by 1.8 million bpd in 2025 and Opec output remaining at current levels.

In a move that could pare supply, G7 countries are considering ways to tighten the price cap on Russian oil, such as with an outright ban or by lowering the price threshold, Bloomberg reported on Thursday.

Russia has evaded the US$60 per barrel cap imposed in 2022 using its "shadow fleet" of ships, which the EU and Britain have targeted with further sanctions in recent days.

Source: Theedgemarkets

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Pepperstone

Economic

WHERE WE STAND

The post-FOMC yo-yo price action persisted yesterday, as participants continued to digest Powell & Co’s hawkish 25bp cut on Wednesday, though a decent chunk of the market moves seen during the decision itself pared as yesterday progressed.

As so often tends to be the case, markets had shifted to a hawkish extreme amid Powell’s remarks, before then gradually edging back from said extreme as the dust settled, and calmer heads prevailed, yesterday.

This was perhaps most evident in the FX space, where the greenback finding sellers against most G10 peers, seeing the DXY slide back under the 108 handle intraday, while the EUR managed to reclaim $1.04 intraday. Some profit taking in long USD positions isn’t especially surprising here, given the rapid nature of yesterday’s rally, though I, personally, remain a dollar bull, and a firm believer in the case for ‘US exceptionalism’.

We can revisit those in 12 months’ time and see how accurate they prove to be, or whether a ‘black swan’ event throws a spanner in the works.

Back to yesterday, and there were plenty of catalysts for participants to digest.

A dovish hold from the BoJ, with Governor Ueda seemingly in no hurry to deliver another 25bp hike, sparked a sizeable sell-off in the JPY, as USD/JPY climbed north of the 157 handle, with spot briefly trading to its highest since mid-July. The window for the BoJ to hike further is shutting rather rapidly, as policy normalisation progresses elsewhere in G10. Nevertheless, Governor Ueda will be speaking again on Christmas Day (I wish I was joking!), which may perhaps offer greater clarity on the conditions required to unlock another rate hike. Still, as the BoJ turn more dovish, just as Fed Chair Powell releases his inner hawk, further upside in USD/JPY seems plausible.

Thursday also brought the final policy decision of the year from the ‘Old Lady’, with the BoE standing pat, as expected, maintaining Bank Rate at 4.75%. The vote split, though, was considerably tighter than expected, with three of the 9-member MPC (Dhingra, Taylor, and Ramsden) dissenting in favour of a 25bp cut. The quid was, predictably, sold on the back of the dovish vote split, though cable did just about manage to cling onto the $1.26 handle.

My BoE base case remains that 25bp cuts are delivered once per quarter next year, with the next such cut coming in February. Risks to this view, though, are tilted to a more dovish outcome, amid increasing signs of overall economic momentum stalling, and with risks to the labour market tilted to the downside, amid the upcoming changes to National Insurance. Were a greater degree of labour market slack to dramatically reduce overall demand, thus leading to an easing in stubborn services inflation, this could lead to a faster pace of normalisation from the BoE, though firm hints in this direction are unlikely until the second quarter, at the earliest.

We also heard from the Riksbank and the Norges Bank, yesterday, neither of whom delivered any surprises. The Riksbank duly delivered a 25bp cut, as well as gain flagging the likelihood that another such cut will be delivered in the first half of next year. Meanwhile, the Norges Bank held rates steady at 4.50%, while repeating that this cycle’s first cut will most likely come in Q1 25.

LOOK AHEAD

We’ve made it! The final day of the final full working week of 2024 is finally upon us!

A busy-ish economic calendar awaits. Here in the UK, this morning brings the latest retail sales report, with sales set to have risen by 0.5% MoM in November. However, the ONS’ reference period for the figure likely fell before the majority of ‘Black Friday’ discounting begun, which may pose some downside risk to consensus expectations. The latest public sector borrowing figures are also due, and will be of particular interest given the perilous fiscal backdrop, especially after the 10-year Gilt yield rose to a fresh post-Budget high north of 4.60% yesterday.

Elsewhere, the stateside calendar sees the latest PCE inflation figures scheduled. Chair Powell, helpfully, informed us at Wednesday’s press conference that headline PCE is set to have risen by 2.5% YoY in November, with the core print having risen 2.8% YoY. Hence, the figures are unlikely to spring much by way of a surprise. The same can be said of the final UMich consumer sentiment print, which is seen unrevised at 74.0.

Once that’s out of the way, we can all go to the pub. A merry Christmas to all!

To stay updated on all economic events of today, please check out our Economic calendar

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IC Markets

Economic

Markets Calm After Fed Storm – Nasdaq off 0.1%

US stock markets had a bit of a breather yesterday after Wednesday’s volatile post-Fed moves. All three major indices closed close to flat: the Dow added 0.04%, the S&P lost 0.09%, and the Nasdaq fell 0.1%. The US Treasury yield curve steepened, with the 2-year yield losing 3.8 basis points to move back to 4.317%, while the 10-year benchmark moved 4.8 basis points higher to 4.562%. The dollar continued to push higher, although much slower than its post-Fed surge, with the DXY gaining 0.27% to close at 108.40. Oil prices fell again as future demand concerns continued to weigh, with Brent down 0.95% to $72.69 and WTI down 0.91% to $69.38. Gold had a lively day as well, ultimately recovering a small amount of the previous day’s loss, closing up 0.24% at $2,593.05.

Cable to Weaken After Dovish Bank of England

It has been a near-perfect storm for Cable bears over the last few trading sessions as both associated central banks have pushed the major currency pair lower. Cable was on the back foot into yesterday’s Bank of England rate call after the Fed produced a hawkish cut the previous day. When the MPC held rates as expected, but the rate vote showed that 3 members (not the expected 2) had pushed for a cut, we saw a further extension of the move south. The market is now pricing in 55 basis points worth of cuts next year, compared to 45 basis points before the decision, and traders will be looking for levels to sell in the coming days. Cable has found some support near the November low, but a break lower now opens the way for a move to challenge the annual low at 1.2296 before the end of the year.

Another Busy Calendar Day to See Out the Week

It’s another full calendar day today to close out the week, with macroeconomic events scheduled across all three trading sessions. Chinese markets are in focus in the Asian session, with the key Loan Prime Rates updates scheduled for midway through the day, with investors again hoping for some stimulus for the world’s second-largest economy. Another day and another data release from the UK once Europe comes into play, with Retail Sales numbers due out early in the session. The expectation is for a 0.5% increase in the month-on-month data, and a miss here could see Cable drop hard. The US day kicks off with focus north of the border on Canadian Retail Sales, but US Core PCE data is set to dominate overall market sentiment as we move into the final trading session of a volatile week.

To stay updated on all economic events of today, please check out our Economic calendar

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FastBull Featured

Daily News

Economic

[Quick Facts]

1. There may be three more hawkish FOMC members in 2025.

2. Cautionary notice: $6.5 trillion options expiring.

3. Russia agrees a temporary ceasefire with Ukraine, but Kyiv refuses.

4. BoJ maintains rates unchanged for the third straight time.

5. The US government shutdown looms.

[News Details]

There may be three more hawkish FOMC members in 2025

In 2025, the annual changes to the Federal Open Market Committee (FOMC) voting members may have an impact on the rate-cut process. The incoming members are expected to be more hawkish.

Cleveland Federal Reserve Chair Harker will leave the FOMC, to be succeeded by Chicago Federal Reserve Chair Goolsbee, who believes that the policy interest rate needs to be significantly lowered next year, compared to Harker's dovish stance. Two new members – St. Louis Federal Reserve Chair Muehlbaum and Kansas City Federal Reserve Chair Schmid – will replace Atlanta Federal Reserve Chair Bostick and San Francisco Vice Chair Daly, who are considered to be in the middle ground.

Cautionary notice: $6.5 trillion options expiring

As investors consider the Fed's intention to slow down rate cuts, the historically turbulent Friday options expiration marks the final risk factor before the end of the year. On Friday, $6.5 trillion worth of individual, index, and exchange-traded fund (ETF) options will expire, the largest of the year, second only to last year's, and among the highest in history, though slightly lower than a year ago. Given the Fed's third consecutive rate cut on Wednesday and its suggestion of preparing to slow down rate cuts, this timing is particularly unusual. In such circumstances, stock volume often spikes, and as options expire or traders establish new positions, stock price fluctuations are common.

Russia agrees a temporary ceasefire with Ukraine, but Kyiv refuses

Russian President Vladimir Putin stated during a live broadcast that Russia had agreed to temporary ceasefires with Ukraine at least three times, but Kyiv refused. Putin pointed out that Hungarian Prime Minister Orban had suggested a Christmas ceasefire, stating that "they won't do much in two or three days." Putin said that "Russia agreed to at least three such short-term ceasefires." Putin also noted that Turkish President Erdogan had made similar mediation proposals to Russian leaders, but after Putin's agreement, "Ukraine's leaders announced: no negotiations, no ceasefire."

BoJ maintains rates unchanged for the third straight time

On Thursday, the Bank of Japan (BoJ) kept its interest rate unchanged at 0.25%, marking the third consecutive time it has deferred raising rates since hiking them in late July. According to the policy statement, there remains considerable uncertainty about the outlook for both the Japanese economy and prices. The central bank will keep a close watch on exchange rates, market developments, and their implications for the domestic economy and prices.

BoJ Governor Kazuo Ueda remarked at a press conference that, considering numerous uncertainties, the central bank decided against hastening further rate hikes and will continue monitoring the effects of U.S. economic policies on global and specifically Japanese economies, assessing wage growth sustainability, and observing price dynamics.

Although the BoJ's slower approach to tightening monetary policy is aligned with market forecasts, in reality, various indicators provide ample justification for a rate hike this month.

Firstly, core inflation in Japan is gradually increasing. Additionally, with the advancement of corporate investment plans and successful progress in annual wage negotiations, the Japanese economy is moving toward a virtuous cycle linking wages and prices. Concurrently, the BoJ has persistently sent hawkish signals, indicating that if the economy performs according to projections, it will raise interest rates. Moreover, the BoJ claimed that past unconventional easing measures were insufficient to stabilize inflation at 2%.

At present, the BoJ appears to consider 4 factors: first, whether Japan's economic momentum has established a solid foundation; second, it cannot accurately gauge if the current favorable performance stems from advantages provided by a weak yen and low-interest rates or is a result of reduced deflationary expectations post-Japan's interest rate hike; third, fearing a recurrence of severe market fluctuations akin to those seen when rates were last increased; fourth, concern arises from the 'Trump 2.0' policy uncertainties, as the outcomes of tariffs imposed by Trump on Japanese prices remain unknown.

The US government shutdown looms

A Republican funding bill supported by US President-elect Donald Trump was voted down in the House of Representatives on Thursday by 174 to 235. The bill was hastily crafted after Trump and billionaire Elon Musk undermined a previous bipartisan agreement. Although the bill received Trump's support, 38 Republicans voted against it, while all other Democrats except three voted against it.

Under Trump's urging, the revised bill would also suspend the debt ceiling for two years, making it easier to pass his promised massive tax cuts and pave the way for the federal government's debt to continue rising.

Even if the bill passes in the House, it has little chance of passing in the Senate, which is currently controlled by the Democratic Party. The White House states that Democratic President Joe Biden does not support the bill.

Government funding will expire at midnight on Friday. If Congress fails to extend this deadline, the US government will begin a partial shutdown, with border enforcement to national parks funding being interrupted.

One of the labor department agencies that would be completely closed if the shutdown continues until inauguration day is the Bureau of Labor Statistics. If the closure continues until the inauguration day, it may delay monthly reports on employment and job vacancies, inflation indexes, and import data. Policymakers and investors who rely on data will have to seek third parties to fill the gap in economic health.