A Look at the Day Ahead in European and Global Markets

By Tom Westbrook

China's equity markets are rallying, leveraging the authorities' vague promises of support for the struggling economy. Stocks have risen to their highest levels in nearly a month.

Monday's state-media readout from China's Politburo indicated a shift from "prudent" to "moderately loose" monetary policy, aiming to boost consumption.

Although no specific details were provided, like in September, investors are eager to capitalize on the news.

Conversely, warning signs appeared in China's foreign exchange market, which remained stable, and bonds that rallied, driving yields to record lows, demonstrating skepticism about actual growth recovery.

As noted by Michael Pettis, a senior fellow at Carnegie China, significant debt has accumulated under previous "prudent" conditions without reviving domestic demand.

Pettis remarked, "The problem with Chinese monetary policy until now has not been that its tightness has led to slow growth and low inflation, but rather that its looseness has caused deeper imbalances and deflation, focusing almost exclusively on the supply side of the economy."

European stocks already received a boost from China's policy shift, especially in mining and luxury goods, and the ongoing rally in China may provide additional support in the upcoming session.

The data calendar is mostly empty ahead of a busy few days. U.S. inflation data is set for release on Wednesday, with a central bank meeting in Canada and rate decisions expected on Thursday from the European Central Bank (ECB) and the Swiss National Bank (SNB).

The ECB is projected to cut rates by 25 basis points, while the Bank of Canada looks to reduce by 50 bps. Switzerland may follow suit with a 50 bps cut, given its efforts to stabilize the Swiss franc.

Australia's central bank concluded its year on Tuesday with an unexpected dovish shift, omitting the phrase "not ruling anything in or out" regarding future policy moves, instead expressing confidence in inflation returning to target.

Consequently, the Australian dollar dropped about 0.6% to $0.6401.

Key Developments Influencing Markets on Tuesday:

• German final CPI

(Editing by Edmund Klamann)