Weekly market update: Fed cuts rates as expected but markets remain focused on the AI rally
Last week’s interest rate cut from the Federal Reserve was not a surprise. Jerome Powell’s Fed has managed to hold out against political pressure for much of the year. But, as the rate of inflation appears to have levelled off, the steady drip feed of disappointing updates on the state of the US jobs markets and weakening consumer confidence have made it harder for the Fed to withstand calls for it to cut. Communication from the Fed following this week’s decision show its priority has shifted from bringing down inflation to strengthening the economy, at least in the short term, causing the dollar to weaken slightly but Powell has warned against assuming there will be aggressive rate cuts next year.
Meanwhile, US equities continue to show signs of investor nervousness. The Fed rate cut helped boost sentiment and the S&P 500 managed to hit a fresh all time high this week but disappointing updates from Oracle and Broadcom triggered selling in tech stocks as sales growth failed to match lofty expectations. Lower interest rates may be on Donald Trump’s Christmas wish list, but equity investors are likely to settle for more confidence that all that AI spending will be rewarded with sustainable revenue growth.
US: Divided Fed board cuts rates by a quarter point
The Federal Reserve cut interest rates by a quarter percentage point last week to between 3.5-3.75%. This is the bank’s third rate cut since September, after a nine-month hiatus. The Fed vote was split between holding and cutting, as concerns about inflation take precedence over concerns about jobs. The US president and his Treasury Secretary have been pushing for the bank’s benchmark rate to be cut by 1.5%. They are actively searching for a Fed chair that shares this view to take over from current chair Jerome Powell, who has been resistant to political pressure. Powell said further rate cuts would be hard to justify, given high inflation.
Bonds rallied following the cut. The yield on two-year Treasury bonds, which moves inversely to their price, dropped 0.1 percentage points. The S&P 500 gained following the announcement but relinquished its gains after Oracle’s quarterly results fell short of forecasts. The dollar weakened against most major currencies as the outlook makes the European Central Bank and Bank of England appear less likely to cut rates.
OIL: Production rise expected to cause SUPER GLUT in 2026
The price of oil is forecast to fall further in 2026. Oil trader Trafigura expects a small rise in production and a slowdown in demand growth to combine to create a significant oversupply and continue to force down the oil price. Brent crude has fallen almost 20% in 2025 as OPEC+ countries have steadily increased production this year and major oil companies have been maximising supply to shore up profits. OPEC countries are expected to continue increasing their output next year and current US government energy policy is focused on driving up shale oil production.
The International Energy Agency is forecasting a modest increase in supply next year, but Trafigura expects significantly weaker demand growth from China as its growing number of electric vehicles further reduces demand for petrol. UK and global energy stocks have lagged broad markets in 2025 as lower prices and restructuring have reduced profits. The US is pushing for a Ukraine peace deal to include the resumption of Russian oil and gas exports to Europe and this has added downward pressure to prices.
M&A: Warner Bros in a love triangle with Paramount and Netflix
Netflix and Paramount are competing to buy Warner Bros Discovery. Paramount had been courting Warner Bros for two years and has pitched ever higher bids for the media company, especially since September. However, Warner Bros’s board approved an $83bn cash-and-stock bid from Netflix. Under the deal Warner Bros would spin off its broadcasting assets, like CNN, before the merger. This did not sit well with Paramount, which gate-crashed the union with a $108bn all cash hostile bid for the whole enterprise last week Monday. Paramount’s CEO has bypassed Warner Bros’s board and met with its shareholders to make the case for his offer over Netflix’s deal.
Netflix has lost 25% or $100bn in market value since merger talks surfaced in September. Paramount shares have fallen as well. Warner Bros’s shares are up over 80% since then, as each successive bid drives its price higher. The two companies are among the biggest TV streaming firms, and the deal is likely to be scrutinised by federal competition regulators, with the US president saying he will be pitching in as well.
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