Hi there,

In today's newsletter, we cover three significant stories impacting financial markets, economic policy, and geopolitical dynamics. First, the London Stock Exchange Group Plc faced its third outage in recent months, disrupting trading for about 2,000 smaller shares. This recurrence raises concerns among investors and regulators, affecting confidence in LSEG's operations. Meanwhile, in the realm of central banking, European Central Bank Executive Board member Isabel Schnabel's remarks on a notable inflation slowdown have sparked speculation about a potential interest rate cut in March. Market reactions and concerns over geopolitical tensions add complexity to the economic landscape. Lastly, Israel contemplates another short-term cease-fire with Hamas to secure the release of the remaining 137 hostages held since October 7. This development follows a recent seven-day cease-fire that ended on December 1, during which Hamas returned 110 hostages in exchange for the release of Palestinian prisoners by Israel. The situation continues to evolve, with Qatar actively involved in brokering potential pauses in the conflict.

– Matheus Zani & Daniel Porto

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2. ECB’s Schnabel Shifts Stance as Inflation Slows

European Central Bank (ECB) Executive Board member Isabel Schnabel's recent comments on a significant slowdown in inflation have led to increased market speculation about a potential interest rate cut as early as March. Schnabel cited a surprising drop in euro-area inflation and emphasized the remarkable decline in underlying inflation. Market reactions have resulted in bets on faster and deeper rate cuts, with expectations of a quarter-point drop by March and 150 basis points of decreases by the end of the next year. However, Schnabel, while ruling out another rate hike, remained cautious about predicting a rate cut and highlighted the need to observe evolving economic conditions. Despite positive inflation developments, concerns over geopolitical tensions and potential reversals in fiscal measures are noted. Policymakers are expected to keep rates steady in the upcoming meeting, and UBS economists suggest a potential revision of growth and inflation outlooks for 2023 and 2024. The discussion on reinvestments under the pandemic emergency portfolio is on the horizon, but Schnabel downplayed its significance, emphasizing the relatively small amounts involved.

3. Israel Considers Cease-Fire for Hostage Release

Israel is open to another short-term cease-fire with Hamas, contingent on an agreement to release more of the 137 hostages still in captivity since October 7. The goal is to secure the release of all those seized while concurrently targeting the destruction of the Islamist militant group. During the recent seven-day cease-fire that ended on December 1, Hamas returned 110 hostages in exchange for the release of about three times as many Palestinian prisoners by Israel. However, the cease-fire ended when Hamas failed to return all women and children. Israel is considering a temporary pause to facilitate the release of remaining hostages. Qatar, which helped broker the previous cease-fire, is working to secure a fresh pause, emphasizing that it is not an alternative to a permanent cease-fire. Israel's government spokesperson, Eylon Levy, defended Israel's efforts to protect civilians amid criticism of air strikes and ground invasions in Gaza, stating that advance warnings are given before strikes. Levy also indicated that the next phase of the conflict would involve close-quarter fighting with Hamas, and he seemingly confirmed government plans to target Hamas leaders for assassination, asserting that "every Hamas terrorist is a dead man walking."

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What to look out for today

EUR Producer Price Index
USD S&P Global Services & Composite
USD ISM Services PMIs
USD JOLTS Job Openings
AUD AiG Industry Index

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