Peace in Ukraine? – What’s at Stake for Europe
The meeting at the White House between Volodymyr Zelensky, Donald Trump, and several European leaders marked a significant step in the peace negotiations. It reassured the markets, suggesting a potential easing of geopolitical tensions and the possible end of a conflict that has been both deadly and costly.
While these negotiations are expected to be complex and lengthy, since they must address sensitive issues such as territorial claims and security guarantees, nonetheless they offer the prospect of a diplomatic outcome. Should a comprehensive agreement be reached and accepted by all parties, the economic implications would be especially favourable for Europe: lower gas prices would support household purchasing power and industrial output, while financial markets would benefit from a reduced risk premium, encouraging the return of capital flows, a trend already initiated following Germany’s recent budget announcements and the increase in defence spending across Europe.
The Fed’s pause is coming to an end
The annual Jackson Hole symposium, a key event for central bankers and investors, this year offered a particularly closely watched platform to Federal Reserve Chair Jerome Powell. His speech came in a politically charged atmosphere, marked by repeated attacks from President Donald Trump on the Fed’s independence.
In this context, Powell chose to reaffirm the institution’s credibility while paving the way for a new phase of monetary easing. The message delivered at Jackson Hole left little doubt about the direction of the Fed’s next meeting. A 25 basis points cut in the key interest rate seems certain, as the central bank now considers its current policy stance too restrictive given recent economic developments.
Monetary policy normalization is becoming imperative as several warning signals emerge in the US economy. Notably, Powell pointed to a sharper-than-expected deterioration in the labour market, with slowing job creation and rising unemployment in certain vulnerable sectors.
Meanwhile, inflation, which has temporarily picked up due to tariffs imposed by the United States amid trade tensions, is expected to ease in the coming months. The Fed views this uptick as transitory and not warranting a more restrictive stance. In contrast, the risks weighing on activity and employment call for a stronger monetary policy response.
It is therefore likely that the upcoming rate cut will not be a one-off move. Further reductions are conceivable by year-end and could extend into 2026, in order to restore financial conditions conducive to sustainable growth and a more resilient labour market.
US financial markets reacted positively to Powell’s speech. Both bonds and equities posted significant gains. The dollar, however, took a hit in response to the anticipated narrowing of yield differential between the greenback and other currencies.
Historically, monetary easing phases create a favourable environment for risk assets. In a context where investors are watching closely for tangible signs of Fed support, Wall Street is likely to be driven by the prospect of looser financial conditions and a gradual rebound in economic confidence.
This week’s figure: +15%
Reflects the year-to-date performance of China’s Shanghai Composite Index, now above its late-August 2015 level, supported by easing geopolitical tensions between China and the United States.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
