European and Global Markets Outlook by Tom Westbrook

As we look ahead in European and global markets, the prospect of a global easing cycle is becoming increasingly likely, with the majority of Federal Reserve policymakers leaning toward interest rate cuts.

The anticipated reduction in U.S. rates provides smaller economies with the flexibility to adjust their monetary policies. Already, the Bank of Korea has hinted at a potential rate cut in October, and Bank Indonesia has indicated plans for cuts in the fourth quarter.

This expectation of lower U.S. rates has led traders to steadily sell off the dollar, given that U.S. short-term rates—currently at 5.25-5.5%—are expected to see the most significant reductions. Markets have priced in 161 basis points of easing in Europe by the end of next year, 135 basis points in Britain, and a more substantial 222 basis points in the U.S.

The dollar has reached one-year lows against both the British pound and the euro, each of which has surpassed major resistance levels. This has fueled speculation that the dollar may be entering a cyclical downturn.

On Thursday, Purchasing Managers’ Index (PMI) data from the U.S. and Europe will provide insights into the relative economic momentum of these regions. Despite sluggish growth in Europe, the euro has seen a strong rally in recent weeks.

A weaker dollar generally supports global growth by encouraging investment in emerging markets and allowing other economies to maintain lower interest rates. This is also beneficial for commodities.

Metal prices have been recovering from multi-month lows, bolstered by reports of additional supportive measures for China’s property market.

However, oil faces its own challenges, with traders concerned about demand as economic data points to a weakening global economy. Brent crude futures, at $76.11 per barrel, are hovering near the year’s low.

In Japan, data showed that factory activity contracted slightly in August, while the service sector continued to expand.

Key Developments to Watch on Thursday:

• Economic indicators: PMI data from Europe, Britain, and the U.S., as well as U.S. jobless claims.
• Corporate earnings: Swiss Re.