Middle East, ECB, and Looking Ahead

As tensions continue to escalate across the Middle East, yesterday the IDF said that they killed Ibrahim Muhammad al-Qubaisi, a Hezbollah commander in charge of the terrorist group’s missile and rocket systems.

With the airstrike taking place in Beirut’s Dahieh district, the operation marked the latest incident in which Israeli missiles have been used to target Hezbollah in the north of Lebanon. Yesterday afternoon, Israeli Prime Minister Benjamin Netanyahu committed to continuing to strike Hezbollah targets in Lebanon, as the UN’s special co-ordinator warned that the Middle East was on the edge of “imminent catastrophe”.

According to the Lebanese health ministry, six people were killed in the strike with 15 others injured, and comes in the wake of the IDF’s airstrikes on Lebanon on Monday which left over 500 people dead

Leaders of the international community continue to warn over the dangers of escalation, with many expressing such sentiments during the UN General Assembly yesterday. For example, US President Joe Biden saying that “A full-scale war is not in anyone’s interest. Even as the situation has escalated, a diplomatic solution is still possible.”

As such, during his last address to the UN General Assembly as President, Biden said that he is “determined to prevent a wider war that engulfs the entire region”. Speaking on CNN, one senior aide said that Biden “will be huddling with other leaders to try to bring about a ceasefire and hostage deal in Gaza and really critically, to try and avert an all-out war in the Middle East.”

Yesterday, the ECB’s Klaas Knot signalled that Frankfurt would likely continue to ease monetary policy “in the near future” with rates continuing to be cut over H1 2025. Given that Knot is generally considered to be one of the more hawkish policy makers, his dovish comments helped to raise expectations that Frankfurt may be inclined to bring down rates more aggressively than previously thought.

While Knot spoke of further monetary loosening on the horizon, he also signalled that long-term interest rates would be unlikely to as low as those seen over much of the last decade.

Knots comments come as markets upwardly revise their expectations of the ECB conducting a 25bps rate cut during their next policy meeting. Money markets are now implying that around a 60% chance of a rate cut has now been priced in for the ECB’s October meeting, a 40-percentage point increase from last week.

On 11 September, the ECB met market expectations in cutting rates by 25bps, marking the central bank’s second cut in two months, following nine consecutive months of rates being held at their highest level in the currency union’s history. Notwithstanding the cut, they cautioned that “the Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner” and as such “will keep policy rates sufficiently restrictive for as long as necessary”.

With all eyes on the increasingly fragile situation in the Middle East, markets will be keeping a close eye on the extent to which it will feed into global risk sentiment. Elsewhere attention will also turn to the release of the latest US GDP figures tomorrow afternoon, as markets look for further insight into the health of the world’s largest economy amid a slowing labour market and the Federal Reserve’s decision to cut 50bps last week. Tomorrow afternoon will also see the release of US PCE figures alongside jobless claims and durable goods orders. Markets will also look towards the release of the BoJ’s monetary policy minutes tomorrow morning, ahead of the SNB’s interest rate decision.