November Chaos: Interest Rates, AI, and Turmoil in Asia – With a Glimmer of Peace in Europe

Is the AI bubble about to burst? Can Europe achieve peace?

And will the U.S. Federal Reserve cut rates in December? These were the three questions driving major swings in the financial markets in November.

In the U.S., federal employees returned to work after the longest government shutdown in the nation’s history.

The reopening helped clear the fog over the American economy caused by missing data, and a few surprises emerged.

A potential peace plan between Ukraine and Russia was put on the table, sparking hope for growth in Europe – but is there enough political will and momentum from Europe’s economic engine, Germany?

In Asia, Japan’s new Prime Minister, Sanae Takaichi, triggered the worst conflict between Japan and China in 15 years, prompting a surprise call from the Chinese president to President Trump.

The Interest Rate Rollercoaster

After 43 days of shutdown, politicians in Washington managed to agree on a temporary funding bill. This allowed over a million U.S. federal employees to return to work, and crucial economic data began flowing again.

The delayed September jobs report revealed a surprising 119,000 new positions, well above the expected 50,000.

A stronger labor market initially suggests that the Federal Reserve (Fed) might hold rates steady through December.

Previous declines in U.S. employment were the main reason the Fed looked past inflation and cut rates at its last two meetings.

But November turned into a true rollercoaster for rate expectations.

Large swings in market expectations so close to a Fed meeting are extremely rare:

• At the start of the month, the market priced in almost a 100% probability of a rate cut.
• After the jobs report, that probability dropped to around 30%.
• By the end of November, it had climbed back to roughly 80%, following comments from several senior Fed officials, including Vice Chair John Williams, signaling that a December rate cut is possible.

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These Fed statements came after consumer confidence in November fell more than expected – the largest drop since April.

This could dampen U.S. consumer spending in the coming months, giving the Fed an incentive to stimulate the economy with a rate cut.

At the same time, the Federal Reserve’s Beige Book – a survey of the 12 regional Fed banks – showed slight declines in employment.

The Beige Book is a key input ahead of the Fed’s meeting, especially since the official jobs reports for October and November won’t be released until after the December 10 meeting.

A Wicked Witch

While investors were focused on the U.S., dramatic developments unfolded in Asia.

Japan’s new Prime Minister, Sanae Takaichi, stirred tensions by stating that a Chinese attack on Taiwan would threaten Japan’s very survival – a sharp departure from previous administrations’ positions.

China responded with trade sanctions, halting imports of Japanese seafood and films, and urged Chinese citizens to avoid Japan.

Chinese media even labeled Takaichi a “wicked witch.” In response, Japan advised its citizens in China to take extra safety precautions.

The escalating conflict prompted a rare phone call from Chinese President Xi Jinping to President Trump at the White House, where Xi reaffirmed China’s claims over Taiwan.

Shortly after, Trump called Takaichi.

It remains unclear what was discussed and whether the U.S. president offered full support.

Takaichi later stated that Trump had called her “a very close friend” and ended the call with, “You can call me anytime.”

A Geopolitical Triangle

De facto, Taiwan currently operates as an independent state.

China, however, views the island as part of its territory, with Beijing’s official policy aiming for peaceful reunification. China does not, however, rule out military action if Taiwan formally declares independence.

The U.S. has not officially recognized Taiwan as a state but under the Taiwan Relations Act, has pledged to help Taiwan defend itself.

Taiwan holds immense strategic importance, both militarily and economically. The island, home to just over 23 million people, dominates the global advanced microchip market through TSMC – the engine behind the entire AI boom.

Over the years, Taiwan has become a geopolitical tinderbox, repeatedly triggering crises, particularly between China and the U.S.

While markets have remained calm so far, any further escalation could disrupt the world’s most important chip and technology supply chains, creating significant market volatility

Peace in Ukraine?

Amid escalating geopolitical tensions in Asia, the U.S. attempted to kickstart a peace process in Ukraine.

The draft peace plan includes a freeze of frontlines, easing of sanctions on Russia, and the possibility of Russia being reintegrated into the current G7 framework (a forum for the world’s seven largest economies).

Unsurprisingly, the plan received a lukewarm response in both Kyiv and Brussels.

The greatest enthusiasm for the plan was reflected in the European stock index STOXX Europe 600.

Since the plan’s release, the U.S. and Ukraine have been negotiating its various points. The original deadline for the negotiations was Thursday, November 27.

This has now been pushed back to a date that could be weeks or even months away.

From Russia’s side, it is considered premature to talk about finalizing a peace agreement in the near future.

Come on, Germany!

The war in Ukraine has added cost and strain to the European economy, but it has also made it more adaptable.

At the same time, it has accelerated strategic investments to bolster energy security and Europe’s defense capabilities.

German Chancellor Friedrich Merz announced in February massive investments in infrastructure and defense over the coming years.

This has sparked significant optimism about the German and European economies – especially after several years in which Europe’s largest economy held back on major investments.

The announcement raised German growth forecasts for 2026 and 2027 to 1.1% and 1.5%, respectively, compared with a largely stagnant economy over the past five years.

However, Germany’s economy is still lagging. Industrial production is declining, as is employment. The Ifo Index, a key measure of business sentiment, signaled low growth in November.

European markets are still waiting for Merz’s promised billions.

The next six months will be critical.

If Chancellor Merz fails to accelerate the planned investments in infrastructure and defense, European industrial production risks further stagnation.

A Christmas Rally in the Stock Market?

We can’t avoid talking about AI and tech companies. In November, the long-awaited earnings report from the world’s most valuable company – Nvidia – was released, a report that investors hoped would ease concerns about an AI bubble.

The chip giant delivered strong results, and CEO Jensen Huang reported robust demand for AI in the coming months.

The stage seemed set for a market rally – but Federal Reserve Governor Lisa Cook put the brakes on.

In a speech, she highlighted the risks of highly valued U.S. stocks.

Among other points, Cook noted that the top ten percent of earners in the U.S. account for half of all private consumption. Rising stock prices – and the wealth they generate – have been supporting the economy, where private consumption makes up 70% of U.S. GDP.

Cook’s remarks refocused investors on the valuations of American tech stocks.

This means that, for now, it is largely the Federal Reserve that will determine whether the stock market enjoys a festive boost – potentially through a rate cut in December.

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