Ever wake up, check the markets, and feel like nothing has really changed overnight? That was pretty much the vibe across Europe this morning.
After a fairly gloomy finish yesterday, the continent’s major indices are once again hugging the flatline – or dipping just below it – as we flip the calendar to the final month of 2025. It’s that strange time of year when everyone is talking about “position squaring” and “waiting for the Fed,” yet nobody wants to make a big move until the picture gets clearer.
A Hesitant Start to the Last Trading Month of 2025
Here’s the opening call as I write this on Tuesday 2 December: the FTSE 100 expected down a whisper (around 10 points), Germany’s DAX basically flat, the CAC 40 in Paris off by roughly 0.2%, and Italy’s FTSE MIB treading water. The broader Stoxx Europe 600? Same story – barely a heartbeat.
It’s not dramatic, I know. But sometimes the quiet sessions tell you more than the wild ones. Right now the market feels like it’s holding its breath.
Why the Sudden Caution?
Let me give you the short version first: everyone is glued to the U.S. Federal Reserve meeting scheduled for 9-10 December. According to the latest probability readings, there’s now an 87% chance of a 25 basis-point rate cut. That’s up significantly from just a couple of weeks ago.
When the world’s most influential central bank is this close to easing policy again, European assets tend to take their cues from across the Atlantic. A Fed cut would normally be bullish for risk assets, yet traders seem oddly reluctant to buy the dip aggressively. Why?
- Inflation is cooling, but not collapsing
- Growth indicators remain mixed (especially in the eurozone)
- Geopolitical noise hasn’t gone away
- Everyone is already fairly long after the November rally
Add in the usual year-end window dressing and tax-loss harvesting, and you’ve got a recipe for low-conviction trading.
Across the Channel: What the Bank of England Is Thinking
While the Fed steals most headlines, the Old Lady of Threadneedle Street watchers got an interesting comment yesterday. A member of the Monetary Policy Committee pointed out that roughly half of the movement in UK yield curves these days is driven by factors completely outside Britain.
“About half the moves in our curve actually are generated entirely outside the U.K.”
– Senior BoE policy maker, speaking yesterday
Translation? Whatever the Fed does in eight days will probably matter more for the gilt market – and therefore for UK mortgage rates and sterling – than next week’s domestic data prints.
Most economists still expect the BoE to deliver a December cut of its own, encouraged by softening wage growth and the disinflationary tone of last week’s Budget, and frankly lackluster GDP numbers. But they’ll almost certainly want to see the Fed move first.
Today’s European Data Calendar – Slim but Not Meaningless
We’re not exactly buried under top-tier releases today, but a couple of numbers could move the needle.
- Spanish and Italian unemployment rates (morning)
- Final eurozone November inflation figures (11:00 CET)
- Producer price index for the currency bloc (also 11:00)
The flash HICP reading came in slightly cooler than expected last week, but core measures are still proving sticky above 2.5%. Another downside surprise could cement expectations for an ECB cut as soon as January, while a hot print would remind everyone that the “last mile” of disinflation is always the hardest.
Sector Snapshot – Where the Action (or Lack Thereof) Is
Mining stocks are soft again as iron ore and copper prices retreat. Defensive areas – utilities, healthcare, consumer staples – are holding up relatively well. Banks are mixed; some of the big UK and Scandinavian names are drifting lower on rate-cut worries.
Luxury stocks, which have had a torrid few months, are trying to stabilize after last week’s bounce, but volume is light and conviction feels thin. In my experience, when LVMH and Kering can’t get any traction even after decent China data, you know sentiment is fragile.
The Bigger Picture for December
Historically, December is actually a pretty decent month for European equities – the Stoxx 600 has posted an average gain of around 1.6% since 2000. But averages hide a lot of variation. When central banks are in flux and positioning is stretched, those seasonal tailwinds can disappear fast.
Perhaps the most interesting aspect right now is valuation. The Stoxx 600 trades at roughly 13.8 times forward earnings – hardly stretched compared to the S&P 500 at 21 times. If global liquidity remains accommodative into 2026, Europe actually looks reasonably attractive on a relative basis.
But – and it’s a big but – that assumes no major growth scare and no re-acceleration in inflation. Both risks feel higher today than they did in September.
What I’m Watching This Week
- Thursday’s ECB speakers – any hint about January pricing
- Friday’s U.S. non-farm payroll print (the last big input before the Fed)
- Any surprise moves in bond yields – 10-year Bunds back above 2.4% would raise eyebrows
- Currency markets – EUR/USD flirting with 1.05 again
Until then, expect more of the same: low volatility, range-bound trading, and a lot of staring at screens waiting for catalysts.
Sometimes doing nothing is the hardest trade of all. But right now, with the Fed countdown clock ticking and European data still painting a mixed picture, a bit of patience probably isn’t the worst idea in the world.
Here’s to hoping the rest of December brings a few more decisive moves – ideally in the upward direction.
