Rate cut roulette - the week ahead

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 in December, however, there is still plenty going on in the markets - and the next few days could prove eventful.

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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%¹.

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.

Crystal-balling

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. According to a survey by the Financial Times, Wall Street banks think the S&P 500 will rise to 7,500 points by the end of next year - roughly 10% higher than its current level².

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 ³.

For all the apparent cheer, however, investors in the UK are behaving nervously. Record sums were pulled out of equity funds last month and pumped into cash funds, according to data provider Calastone, making November the second worst month on record. Worries about an AI bubble in North America are clearly weighing heavily.

Home turf

Concerns about the domestic economy may also be affecting behaviour - and the Autumn Budget still looms large. Chancellor Rachel Reeves will give evidence to the Treasury Committee on Wednesday about her Budget speech. The day before, the Bank of England’s Monetary Policy Committee (MPC) will likely be quizzed about how the Budget could impact interest rates. 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 squib⁴.

Source:

¹Monringstar
²FT
³Factset
⁴Monetary Policy Report

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.