European stocks hit recent highs as investors anxiously await Fed easing

Investors are awaiting the U.S. Federal Reserve's (Fed) interest rate decision meeting scheduled for later this week, creating a brief atmosphere of tension and anticipation in the market. On October 28 in London, major European stock indices mostly closed higher, with benchmark indices such as the Euro Stoxx 50, Germany's DAX, the UK's FTSE 100, and France's CAC 40 all posting their best performances in recent months. The market broadly attributed this upward trend to investors' optimistic expectations regarding the outcome of the Fed meeting, believing that U.S. monetary policy will remain relatively accommodative in the short term, or at least avoid drastic rate hikes, thereby boosting demand for global risk assets.

Since late 2022, the Fed has implemented multiple rate hikes in an attempt to curb soaring inflation. Although the U.S. Consumer Price Index has recently shown signs of cooling, core inflation remains in double digits. The Fed's dual mandate—maximum employment and price stability—requires policymakers to strike a delicate balance between economic growth and price stability when making decisions. It is widely expected that the Fed may choose to keep interest rates unchanged at this meeting, or in rare cases, implement a minor rate hike to avoid inflicting further shocks on the already fragile global economy. A decision by the Fed to hold rates steady would be viewed as a positive signal to the market, further driving gains in risk assets.

The rise in European stock markets is not merely a reaction to U.S. policy. Major European indices have recently demonstrated resilience, driven in part by improving earnings prospects across certain sectors of European corporations. Technology, consumer goods, and industrial stocks performed particularly well this week, reflecting investors' confidence in corporate earnings growth. Furthermore, the European Central Bank (ECB) expressed a firm commitment to controlling inflation in its recent policy statements, hinting at further monetary policy measures if necessary, which provided additional support to the European market.

In the currency markets, the U.S. dollar strengthened slightly amid expectations surrounding the Fed meeting, with the dollar index edging up on the day and pushing up the exchange rate of the dollar against the euro. Conversely, the euro weakened slightly in the near term due to market optimism regarding U.S. policy. These shifts in currency movements not only affect cross-border investment costs but also directly impact the export competitiveness of European companies. Meanwhile, global bond markets are also influenced by Fed policy expectations, with U.S. Treasury yields remaining within a relatively stable range around the meeting without experiencing drastic fluctuations. If the Fed decides to raise interest rates, the market expects U.S. Treasury yields to rise, which would in turn drive adjustments in global bond markets, particularly concerning European long-term sovereign bond yields.

Under the policy framework of the European Central Bank, the European economy is currently at a delicate turning point. Although the economic growth rates of various European nations showed signs of recovery in early 2024,