Global financial markets surged following the decisive Democratic congressional sweep in the United States, providing investors with a palpable sense of relief. While the exact policy implications of the shift in Washington remain to be seen, the immediate market reaction was defined by a sharp reduction in perceived policy risk. For months, investors had contended with President Trump’s erratic trade and economic policies, which cast a persistent dark shadow over corporate performance, particularly in Europe. With the political landscape shifting to include a congressional check on the executive branch for the remainder of his tenure, market participants quickly priced in a more predictable regulatory and legislative environment.
This optimism translated into a broad-based rally across European stock markets, which climbed roughly 2%. Wall Street mirrored the enthusiasm, opening with 2% gains across the board. Beneath the headline figures, intraday futures trading revealed a robust recovery of more than 3% for the technology-heavy Nasdaq index. Despite this powerful rebound, market analysts remained divided on whether the sharp artificial intelligence-driven correction observed in October fits into a classic "sell-the-rumour, buy-the-fact" narrative or if deeper structural adjustments are still underway.
Fixed-income markets also reflected the shifting macroeconomic winds. US Treasury yields dropped by between 2.7 and 5.2 basis points, with the belly of the curve notably outperforming the wings. This movement was largely supported by expectations of a prolonged fiscal deadlock in Washington over the next two years, which typically reins in excessive government borrowing expectations. However, a brief, sharp spike in long-term yields occurred mid-session following the release of the Treasury’s quarterly refunding statement. Investors had widely anticipated a strategic shift toward shorter-term maturities and T-bills, but the Treasury kept auction sizes for the 10-year to 30-year bucket unchanged. A subtle yet crucial tweak in official guidance, however, opened the door for potential auction size adjustments in the coming year, briefly unnerving bondholders.
Meanwhile, the US dollar faced persistent selling pressure, weighed down further by retreating energy and oil prices. Brent crude approached the psychologically significant $100-per-barrel barrier, pressured by resurfacing hopes for diplomatic resolutions in ongoing conflicts, including the situation involving Iran. Benefiting from the softer dollar, the EUR/USD exchange rate appreciated toward 1.126, though it still needed to clear the first meaningful technical resistance areas around 1.13. Simultaneously, the US Dollar Index (DXY) tested critical support at 101.2, marking a 23.6% retracement of its broader 2026 upward trajectory.
While US political developments and currency fluctuations dominated the financial headlines, crucial economic data emerged from Europe, where October headline inflation crept upward to 4% from 3.8%. Energy costs continued to exert upward pressure, surging by more than 20% on a year-over-year basis. Beyond the volatile energy sector, underlying price pressures also intensified; non-energy industrial goods inflation quickened to 1.2%, while services inflation climbed to 3.3% from 3.2%.
Wage growth remains the critical engine behind the stubborn persistence of services inflation. Coinciding with the inflation release, the European Central Bank published its latest wage tracker. Headline wage growth is projected at 2.7% for the second half of 2026, ticking up slightly to 2.8% in the first and second quarters of next year, before moderating to 2.4% by the third quarter of 2027. Analysts note that estimates for 2027 carry a caveat due to currently low employee coverage metrics in the underlying data. When excluding one-off payments, average wage growth is expected to hold at 2.7% in the latter half of 2026 before accelerating to between 2.8% and 2.9% in the first half of the upcoming year.
For monetary policymakers, core CPI has emerged as the definitive gauge to watch in the coming months, as it will likely dictate the European Central Bank’s policy trajectory through 2027. While the core underlying measure matched September’s annual rate of 2.5%, its brisk monthly pace of 0.3% warrants close monitoring by central bank officials. Despite these sticky inflation readings, European markets showed a muted direct reaction. European yields drifted lower by a few basis points at the long end of the curve, largely in sympathy with the more pronounced moves in the US bond market. Euro area money market pricing for ECB monetary tightening remained completely unchanged, with a December rate hike fully priced in at an implied probability of about 90%.
Turning to broader international developments, the Riksbank proceeded with a widely anticipated policy move, raising Sweden’s policy rate by 25 basis points to 2%. Stronger domestic economic activity, combined with mounting cost pressures stemming from global supply chain disruptions, has forced Swedish monetary authorities to acknowledge that inflation is likely to continue rising in the near term. Swedish CPIF inflation stood at 1.5% in September, aligning precisely with the central bank’s latest economic projections. Headline figures continue to be artificially suppressed by the direct effects of temporary fiscal policy measures. When these specific distortions are stripped away, underlying CPIF inflation registers at a much higher 3%.
The convergence of robust economic momentum, supply-chain-driven cost increases, and a weaker Swedish krona this year is expected to push both headline CPIF and underlying inflation sustainably above the 2% target next year. The Riksbank signaled that if the current outlook for inflation and economic activity holds true, further policy rate increases are likely over the coming year, mirroring the trajectory outlined in its September forecasts. Swedish money markets currently price in a 70% probability of another 25-basis-point rate hike at the central bank’s first policy meeting of next year in February. In foreign exchange markets, the euro and the Swedish krona maintained a balanced posture, trading just below the psychological 11.00 threshold after the currency pair successfully tested its initial technical support level around 10.92 at the start of the week.
In Central Europe, Czech inflation showed signs of marginal deceleration in October, easing to 2.4% on an annual basis from 2.5% in September, with month-over-month consumer prices rising by 0.4%. Fuel prices, particularly diesel, edged downward compared to September, while food prices experienced a more visible retreat. Services inflation also exhibited a modest moderation. Nevertheless, private-sector estimates suggest that core inflation remained stubbornly sticky, lingering just above the 3% mark.
Looking ahead toward the end of the year, analysts anticipate that Czech inflation will reaccelerate sharply. This renewed upward pressure is expected as the downward drag from lower food prices begins to fade and energy inflation regains momentum. A temporary spike in inflation above 4% would materially increase the probability of an additional monetary tightening step following the widely expected policy rate increase from 3.75% to 4%. Such a move would bring the Czech terminal policy rate to 4.25%. Despite a modest decline in front-end Czech government bond yields by a few basis points, the Czech koruna traded firmer on the day, supported largely by a continued downward trend in international natural gas prices.
