FILE PHOTO: German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, September 18, 2025. REUTERS/staff/ File Photo

By Amanda Cooper

LONDON (Reuters) -Stocks declined on Wednesday, echoing losses on Wall Street overnight, while the dollar rose after Federal Reserve Chair Jerome Powell stopped short of confirming investors' expectations of a looming slide in U.S. interest rates.

In Europe, defence stocks - one of the best performing sectors this year - jumped after U.S. President Donald Trump said he believed Ukraine could retake all its land occupied by Russia, marking a sudden shift in rhetoric in Kyiv's favour.

"After seeing the Economic trouble (the war) is causing Russia, I think Ukraine, with the support of the European Union, is in a position to fight and WIN all of Ukraine back in its original form," he said in a social media post on Tuesday, although there was no evidence of any change in U.S. policy.

Defence stocks, including Rheinmetall, Hensoldt and SAAB, rose between 2% and 5%, although losses in financials kept the STOXX 600 down around 0.3% on the day.

US MARKET SET TO RISE AT OPEN

U.S. stock index futures held in positive territory, up 0.1-0.3%, suggesting a modest rise at the open later.

In a speech to the U.N. General Assembly, in which he rejected moves by allies to recognise a Palestinian state, Trump chastised Western nations for their approach to climate change and immigration, telling leaders "your countries are going to hell".

While geopolitics has been a driver for global markets this year, the focus for investors on Wednesday was the outlook for the U.S. economy and the likely path of U.S. interest rates.

The dollar rose broadly, leaving the euro, pound and yen in negative territory, pushing up the U.S. currency against a basket of six others by 0.5% on the day.

Powell, in remarks on Tuesday, largely stuck to the language used last week when the central bank cut its benchmark rate by a quarter of a percentage point. He underlined the need for policymakers to balance the competing risks of high inflation and a weaker jobs market in upcoming monetary policy decisions.

Given that traders have almost fully priced in a rate cut in October, Powell offered little new direction for markets.

PACE OF CUTS HAS YET TO BE SEEN

"There was a clear pivot at the last meeting which set the direction, but the pace (of cuts) is something we'll have to see," Daiwa Capital economist Chris Scicluna said.

"All markets, if you're looking on the fixed-income side or the equity side, are taking comfort from the expectation that the Fed will be easing for the remainder of this year and again next year and take them basically moving from a restrictive stance to a neutral stance," he said.

Traders have raised their bets on further U.S. rate cuts, with Fed funds futures implying a 91.9% chance of a cut at the central bank's October meeting, up from a 89.8% probability on Tuesday, according to the CME Group's FedWatch tool.

Longer-dated U.S. government bonds performed better than other maturities, as yields on 30-year Treasury bonds edged down 1 basis point on the day to 4.728%, while the benchmark 10-year note was flat at 4.114%, as was the rate-sensitive two-year yield, which held at 3.569%.

U.S. economic data released on Tuesday stoked growth concerns, with purchasing managers' index data from S&P Global showing business activity slowed for a second straight month in September.

"The S&P PMIs were softer in the September preliminary release, but both remain in expansion and are within the range of the last few months," Citi analysts wrote in a research note. But they pointed to more weakness in the details than implied in the headline numbers.

"The composite output prices index fell to the lowest level since April with anecdotes mentioning that firms are having difficulty passing on higher costs to consumers due to weak demand and more competition," the analysts said.

In commodities, the resurgent dollar pushed gold to $3,763 an ounce, down from a session peak at $3,779, just below Tuesday's record high of $3,790.

On the oil market, Brent crude rose 1.1% to $68.34 a barrel. Exports from Iraq's Kurdistan have stalled, which has reduced the prospect of global oversupply, as demand wavers.

(Additional reporting by Gregor Stuart Hunter in Singapore; Editing by Jamie Freed, Jacqueline Wong, Sam Holmes, Sharon Singleton and Barbara Lewis)