Israel and Hamas agree on first steps in Gaza peace plan

In focus today

Today is generally light on the macro data front; however, in the US, the Fed will host a community banking conference in Washington this afternoon, and Chair Powell is scheduled to give pre-recorded opening remarks.

Economic and market news

What happened overnight

In the Israel-Palestine conflict, Israel and Hamas have agreed on the first steps of a Gaza peace plan, including a hostage-prisoner exchange and the gradual withdrawal of IDF troops from Gaza. According to FT, the first hostages are due to be released on Monday marking a pivotal moment in the ongoing conflict. This development is seen as a huge diplomatic win for Donald Trump. However, significant challenges remain regarding the next phases of the plan, especially those related to Hamas disarmament, further Israeli troops withdrawal and the role of international stability forces in the area. The next few days, and next week, will be critical as we will see whether the two sides comply with the first agreed steps and whether they can agree on the next phases. 

Overnight, China introduced extensive new export controls on rare earths and associated technologies, citing "national security". The regulations require foreign companies to

obtain Chinese government approval before exporting products containing even small amounts of Chinese rare earths or those manufactured using China's rare-earth technology. Similar to the US foreign direct product rule, these measures aim to prevent the use of rare-earth materials in military and sensitive sectors.

What happened yesterday

In the US, the minutes from FOMC's September meeting, published last night, did not contain any major surprises for markets. The participants were clearly very divided in their perceptions of the inflation outlook. The minutes noted that 'a few participants emphasized that progress of inflation [towards 2%] had stalled, even excluding the effects of tariffs' and that 'few participants could have supported keeping Fed Funds rate unchanged at the September meeting'. On the other hand, 'some participants remarked that they perceived less upside risk to their outlooks for inflation than earlier in the year'. The next key inflation release, the September Consumer Price Index (CPI), is scheduled for next week's Wednesday, but it might get delayed by the ongoing government shutdown.

In Sweden, the flash estimate for September showed headline inflation at 0.9% y/y (prior: 1.1%%), CPIF excluding energy at 2.7% y/y (prior: 2.9%), and CPIF at 3.1% y/y (prior: 3.2%). This was in line with expectations of a y/y decline in inflation following the summer increase. Details will be released on Wednesday next week, with some summer-season-related components likely driving the decline. The Swedish flash print also indicates downside risks for Norwegian inflation, as similar seasonal factors may weigh on Friday's figures.

In Poland, the National Bank of Poland (NBP) cut the Base Rate by 25bp to 4.50%, citing an improved inflation outlook. Future policy decisions will depend on incoming data regarding inflation and economic activity. The zloty weakened slightly on the news, with USD/PLN trading above 3.66. Attention now shifts to NBP Governor Glapiński's press conference, scheduled for today, for further insights.

In France, outgoing caretaker PM Sebastien Lecornu expressed cautious optimism after two days of talks, stating progress had been made on budget discussions. While no deal was reached, Lecornu believes a path exists to avoid snap elections, and President Macron is expected to name a new prime minister within 48 hours. Opposition leaders, however, remain defiant, calling for elections or Macron's resignation.

Equities: Equities bounced back yesterday, fully reversing Tuesday's losses and setting a string of new all-time highs, driven mainly by cyclicals.

Volatility edged slightly lower, and perhaps most interestingly, European banks were among the best performers, while banks ranked as the worst-performing sector in the S&P 500.

One might be tempted to link the European bank strength to optimism around France and Macron's ongoing struggle to form a government, but that's not the case. The rally was led by Southern European banks, reflecting the relatively solid macro backdrop across Southern Europe these days.

In the US yesterday, Dow 0.0%, S&P 500 +0.6%, Nasdaq +1.1% and Russell 2000 +1.0%

Overnight, Asian equities are trading higher, while futures in both Europe and the U.S. are broadly unchanged.

Even news of tentative progress toward a potential peace framework in the Middle East has had virtually no impact on markets. This is consistent with the pattern we've seen throughout this conflict, where geopolitical developments in the region have carried very limited financial-market significance.

FI and FX: Israel and Hamas confirmed the hostage-release deal announced by President Trump last night. So far, market reactions in FX and fixed income have been muted. Possibly, one could tie the USD's overnight weakening to the positive developments in the Middle East rather than the FOMC minutes. The latter revealed a diverse range of views but could be interpreted as slightly hawkish overall. US interest rates showed minimal response to the minutes' release. European focus remains on France, where the outgoing PM Lecornu noted that some progress has been made on the budget discussions. President Macron is to be announcing a new PM soon.