European stocks rally on Fed rate cut optimism; U.K. budget in spotlight

Investing.com - European stocks traded higher on Wednesday, buoyed by increased optimism surrounding a December rate cut by the Federal Reserve ahead of the U.K.’s Autumn Budget.

The DAX index in Germany closed 1% higher, the CAC 40 in France gained 0.9% and the FTSE 100 in the U.K. also rose 0.9%. 

Rising Fed rate cut expectations  

European equities have followed their counterparts on Wall Street and in Asia higher amid growing expectations that the Fed will cut when it next meets on Dec. 9 and 10.

The broad-based S&P 500 index rose for a third consecutive day on Tuesday after data showed retail sales rose less than expected and consumer confidence weakened, firming up expectations that the Fed will ease policy soon. 

Markets are pricing in a 82.7% chance the Fed will cut rates by 25 basis points during its December 9-10 meeting, up sharply from a 43.4% chance seen last week, CME Fedwatch showed. 

U.K. budget in spotlight  

There was little in the way of economic data released in Europe on Wednesday, and the spotlight was on the U.K. government’s budget. 

Britain’s finance chief Rachel Reeves unveiled a sweeping budget on Wednesday that lifts taxes by £26 billion and pushes the overall burden to a record 38% of GDP by the end of the parliament, according to an Office for Budget Responsibility (OBR) forecast that was mistakenly published ahead of her statement.

Ahead of the announcement, Ruth Gregory, Deputy Chief UK Economist at Capital Economics, said: “We expect the Chancellor, Rachel Reeves, to raise taxes by about £38bn ,,, which will trim GDP growth, weigh on inflation and contribute to more interest rate cuts.”

“That is likely to be received warmly by the markets and could prevent Reeves from having to come back with more tax rises next year.”

The Bank of England next meets in the middle of December, and is widely expected to cut interest rates by 25 basis points to 3.75%, judging that the U.K. economy would need additional support after the budget’s tax increases. 

This view was helped by a survey by YouGov for the U.S. bank Citi showing that the British public’s expectations for inflation over the next 12 months fell to 3.7% in November from 4.2% the previous month.

Long-term inflation expectation also fell to 3.9% in November from 4.2% in October.

AstraZeneca gets U.S. cancer drug approval  

There are little in the way of major earnings reports in Europe Wednesday, but AstraZeneca (LON:AZN) is likely to be in focus after the drugmaker’s cancer drug Imfinzi was approved in the United States as a treatment for adults with certain types of stomach and gastroesophageal junction cancers that can be surgically removed.

Crude trades near one-month lows

Oil prices edged higher but traded near a more than one-month low on Wednesday, with further downside still looking open given an expected supply glut and a potential Russia-Ukraine peace deal.

Brent futures gained 0.5% to $62.10 a barrel, and U.S. West Texas Intermediate crude futures fell 0.2% to $58.23 a barrel.

Both crude benchmarks settled lower on Tuesday after Ukrainian President Volodymyr Zelenskiy told European leaders that he was ready to advance a U.S.-backed framework for ending the war with Russia, potentially resulting in Russian crude re-entering global supply.

U.S. crude stocks fell last week, according to the American Petroleum Institute, with official stockpile data from the Energy Information Administration due later in the session.