Market Review 15th December 2025

Everything you need to know, Simplified!

Summary

• US equities briefly reached new highs following the Federal Reserve’s (Fed) latest interest rate cut, but gains faded as renewed scrutiny of tech valuations weighed on sentiment

• The Fed moved towards a neutral stance, ending quantitative tightening and shifting to maintaining its balance sheet rather than restricting liquidity

• Despite the market’s dovish interpretation, the Fed remains internally divided and strong growth, fiscal stimulus and continued investment in artificial intelligence (AI) could limit the scope for further US rate cuts in 2026

• Rising government debt and persistent deficits are drawing greater investor attention to sovereign borrowing plans; the US deficit rose to US$439bn in first two months of the 2026 fiscal year (Oct and Nov)

• The new US National Security Strategy cemented that economic strength and technological leadership, particularly in AI and quantum computing, are now central pillars of national security

• A busy week ahead includes US employment and inflation data, which will test assumptions around labour market cooling and tariff-driven price pressures

• Central bank meetings from the Bank of England (BoE) and Bank of Japan (BoJ) are expected to deliver a rate cut and a rate hike respectively.

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Market Review

Santa’s sleigh stalls

The typical Santa rally has yet to gain traction, with markets drifting sideways again last week and little in the way of a clear directional signal. Global equities fell around -0.2% in USD terms, with weakness once more concentrated in technology and AI-linked names, while more cyclical areas performed better. Financials led sector performance, followed by materials and industrials, reflecting a rotation away from growth. Market sentiment remains broadly positive.

In the US, equities briefly pushed to new highs on Wednesday following the Fed’s latest rate cut, but gains faded as scrutiny of technology valuations resurfaced amidst uninspiring results from a leading AI-related company.

European markets were mixed and broadly flat, while Japanese equities moved higher, supported by expectations that the BoJ will deliver a rate hike this week.

Powell’s Christmas present

The Fed delivered its widely expected rate cut on Wednesday, taking policy closer to neutral. More significant was the announcement that quantitative tightening will formally conclude, with the Fed transitioning to a balance sheet maintenance regime aimed at keeping its balance sheet broadly stable relative to GDP. In practice, this implies modest balance sheet growth over time, but nothing comparable to historic quantitative tightening programmes.

The timing is partly technical. As quantitative tightening has progressed, liquidity conditions in money markets have periodically come under strain, with bank reserves falling by roughly US$600bn over the past five months. The Fed is now acting to ease repo market (where financial institutions borrow and lend cash short term using securities as collateral) pressures by stabilising reserves. While framed as a technical adjustment, the shift marks a clear transition from a restrictive to a more neutral liquidity stance, which should provide some support to risk assets.

Markets have responded by leaning into a more dovish interpretation of Fed policy, even though the Federal Open Market Committee itself remains unusually divided. Some members remain concerned about inflation, which the Fed has underestimated repeatedly in recent years. For now, those voices have not derailed the easing narrative after three consecutive cuts. Looking ahead, there is a risk that both growth and inflation run above current Fed projections in 2026, supported by tax rebates, deregulation and substantial AI-related spending. On that basis, the scope for a meaningfully more accommodative monetary policy stance may be limited.

That tension is set within a broader backdrop of fiscal expansion. With deficits elevated and fiscal stimulus set to intensify, investor focus is shifting towards sovereign borrowing plans and the longer-term productivity generated by persistent deficit spending.

The Congressional Budget Office estimates that the US budget deficit reached US$439bn in the first two months of fiscal 2026, an amount the Committee for a Responsible Federal Budget’s Maya MacGuineas has described as “simply unsustainable”. As economist John Mauldin wrote over the weekend, “I often describe debt as future spending pulled forward in time. It can be good if used productively. All too often, people don’t. Nor do governments.”

Or, as Adam Ferguson observed in the 18th century in his Essay on the History of Civil Society: “An expense, whether sustained at home or abroad… if it brings no proper return, is to be reckoned among the causes of national ruin.”

National Security Strategy

The administration’s National Security Strategy, released on Thursday, offers a notably direct articulation of its priorities. What stands out is how explicitly economics, productivity and technology are framed as central pillars of national security.

Technology leadership - particularly in AI, quantum computing and advanced manufacturing - is presented not merely as a race between companies, but as a strategic arms race between powers, most notably the US and China. Innovation, resilient supply chains and domestic industrial capacity are positioned as essential to maintaining US dominance.

The core foreign policy objectives outlined carry a strong economic overtone: stabilising the Western Hemisphere; protecting domestic supply chains and access to critical materials; supporting Europe’s security while restoring its ‘civilisational confidence’; preventing hostile dominance of Middle Eastern energy and ensuring that US technology leads globally.

This administration sees economic strength as the foundation of national power. Industrial capacity and technological leadership are explicitly linked to military capability and geopolitical influence. Reshoring and defence-adjacent production sit at the heart of their strategy, reflecting a shift away from globalisation toward a more fragmented world of strategic blocs and spheres of influence.

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The week ahead

Tuesday: US employment report

Our thoughts: The labour market has softened in recent reports and this trend likely continued in the last couple of months although there has been no official data due to the government shutdown. The release this week is anticipated to confirm this trend with the unemployment rate rising to 4.5% in November. In the absence of the official data, alternative private data has shown a little weakness although the data is volatile and prone to ‘noise’ and to some extend can be explained by technical factors.

Tuesday: US CPI inflation

Our thoughts: The first inflation print since September (delayed due to the Federal government shutdown) is expected to show a continuation of the mild increase in price momentum in recent months. Annual inflation in the US is anticipated to accelerate to 3.1% through October and November driven largely by tariff pass-through (showing up in goods inflation). The Fed expects goods inflation to peak in the first quarter of 2026.

Wednesday: UK CPI inflation

Our thoughts: Inflation in the UK is anticipated to slow to 3.5%, continuing its downward trajectory. The BoE anticipate price growth to slow sharply, below 3%, in the first quarter of 2026. If the fiscal tightening from the recent budget crimps growth further the BoE may cut rates more resolutely. In addition, the budget was purposely deflationary, designed to lower the government’s own borrowing costs and provide short-term fiscal headroom - even at the cost of productivity and a sustainable long-term policy.

Thursday: Bank of England interest rate decision

Our thoughts: The Monetary Policy Committee is likely to cut rates this week thanks to undershooting economic growth and slowing inflation. We expect a vote split of 5-4 with Governor Andrew Bailey tipping the balance in favour of a reduction.

Friday: Bank of Japan interest rate decision

Our thoughts: The BoJ are highly likely to raise rates this week given the stickiness of inflation in Japan and the BoJ’s current accommodative stance. The BoJ want to raise rates to alleviate the downward pressure on the Japanese Yen and to soften the cost-of-living pressures for their citizens. The rate decision appears to have the support of the popular new Prime Minister Sanae Takaichi.

Please note: this is the last Weekly Markets Review for 2025. We will return on 12 January 2026.

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