Likely rate cut by European Central Bank

European Central Bank monetary policy announcement scheduled today is one the most important event risks of the week. Analysts should not be surprised if EUR/USD pair broke below 1.10 ahead of this rate decision.

Investors have big expectations for this meeting because of widespread deterioration in the Eurozone economy and talk of recession in Germany. EUR hit a 2-year low last week against the USD as German bund yields tumbled deeper into negative territory.

Back in July, Mario Draghi, Chief of European Central Bank brought up the benefits of a combination of measures and since then the need for stimulus intensified. While investors are preparing for a massive dose of stimulus, there's also a reasonable chance the ECB may under deliver.

The Eurozone economy needs help. Retail sales, inflation, employment and manufacturing activity slowed across the region and in Germany, growth contracted in the second quarter. The region's largest economy is crippled by weak global growth and a collapse in manufacturing. Not only did the PMI manufacturing index fall for the eighth month in a row but it reached to its weakest level in 7 years.

The Bundesbank said there's a very good chance that Germany will fall into a technical recession in the third quarter. With a tense trade war and weakening US and global growth, the grim outlook for the region is why the ECB needs to find ways to stimulate the economy.

The European Central Bank has many options including a rate cut, stronger forward guidance, a new program of asset purchases and compensation for banks to relieve the negative effects of negative interest rates. They prefer a combination of measures because they feel that a package is "more effective than a sequence of selective actions."

The market expects a minimum of a 10bp rate cut. If the central bank combines this with rate tiering or a new Quantitative Easing program, EUR/USD will sell off aggressively but if all they do is cut rates and strengthen their low rate pledge, euro will soar in disappointment.

With EUR so weak, less aggressive measures could trigger a sharp short squeeze in the currency. Unfortunately, there's resistance to a package that includes QE - one of the strongest forms of easing.

Bank of France Governor Villeroy is skeptical of the immediate need for QE while German and Dutch policy makers also believe its too early for the move.

Given the market's lofty expectations, EUR/USD traders could be setting themselves up for disappointment. Draghi could also opt for a stimulus package that does not include the most aggressive measures to leave his successor Christine Lagarde with ammo to fight a deeper slowdown.

  

Rising mental disorder in young Israelis

Nearly three-quarters (73%) of Israeli children aged between 13 to 18 experience some sort of a mental problem or crisis, according to a survey carried out by Enosh – The Israeli Mental Health Association.

The research, which surveyed 500 teenagers and 500 parents of teenagers, found that 78% of teenage girls reported previous mental health issues, compared with 66% of teenage boys. Almost one-third of respondents (32%) said they had experienced mental health problems on at least three separate occasions.

The survey was carried out to coincide with the opening of the “headspace” center in Jerusalem, a facility designed to assist young people aged 12 to 25 who are experiencing mental health issues. Treatments are provided free of charge, and are supervised by the health, welfare and education ministries.

A total of 45% of teenage respondents said they believed or were certain that they would not seek treatment or counseling if they experienced a mental health problem. Only 12% said they would certainly seek treatment or counseling. Willingness to turn to professional help was higher among those 13-14 than those 15-18, the survey revealed, and higher among secular respondents than religious teenagers.

The first source of assistance that teens said they might turn to was a psychologist (48%). Approximately one-third (34%) said they would first approach a school member, and only 17% said they would turn to their family physician. Older teenagers were increasingly likely to turn to psychologists and doctors than school staff.

The leading barrier to receiving treatment was fear of shame, 40% of teenagers said. Other obstacles include the belief that treatment does not help (38%), fear that treatment will negatively impact their future (24%), and that treatment is too expensive (23%).

“The statistics prove that mental health is an issue that affects all of us,” said Enosh executive-director Hilla Hadas. “It’s not a niche issue that matters to only a few, but rather to the wider public.”

The vast majority of patients (94%) said they would probably or definitely refer their child for treatment if they experienced a mental health problem or crisis. Parents expressed a preference for referring their child to private treatment (59%) rather than the public health system (23%). A further 16% of parents said they had no preference, while 2% said they would choose another form of medical assistance.

“It is encouraging to see that Israeli parents understand the importance of mental health care when it comes to their children,” said Hadas. “It is of critical importance to seek assistance in the case of mental health, and we must ensure that there are no barriers preventing teens from receiving help and care at such a critical stage in their lives.”

Is the world ignoring Iran Israel tension?

Media across the Middle East during this past week was focused on Israel-Iran tensions, including inflammatory comments from Beirut to Baghdad about the war on the horizon. Yet much of the tension failed to attract the attention of international community. That doesn’t mean that behind the scenes the US, France and others were not working to calm the issue, but it does appear that most did not take the crises seriously.

The reason is that in Europe is engrossed Brexit, while Trump-centric news cycle spent time wondering if the US would buy Greenland, or if hurricanes would be nuked, or if the G7 would hold a meeting with Russia at a Trump resort.

In addition, there are protests in Hong Kong and a crisis in Kashmir. These are important issues, some of them with ramifications as important as what is taking place in the Middle East. Pakistan and India, for instance, have nuclear weapons.

The airstrike by Israel on 24^th August, and Hezbollah’s claims that it downed Israeli drones on August 25, also did not lend themselves to much of a crisis. A few little drones that looked more appropriate for a wedding planner and an airstrike where only a grainy video seems to underpin Israel’s claims of “killer drones” is not major news globally.

Also, the allegations of Israeli airstrikes in Iraq are opaque. Some storage containers blew up, but there are not many details. And there is fatigue in Western media for stories about violence in the Middle East. In addition, the US is trying to end the Afghan war in the coming months, a war that also gets almost no media attention anymore.

Nevertheless, the Israel-Hezbollah tensions and US-Iran tensions have major ramifications. Jerusalem has said that Tehran is entrenching in Syria, and that it sends precision guidance technology to upgrade Hezbollah’s arsenal of 130,000 missiles. Hezbollah says it can strike all of Israel. Iranian-backed Shi’ite paramilitaries in Iraq are important, as is their long-term affect on Iraq and the region. Hezbollah holds the US and Israel responsible.

That could have an impact on US-Iraqi relations, and the long-term strategy to defeat ISIS. It is no surprise that ISIS is trying to expand again in Syria and Iraq with small attacks. Baghdad has launched major offensives to crush the ISIS networks, but Iraqis are dying in these battles every day. These tensions also relate to other tensions in the Gulf, as well as between Saudi Arabia and Houthi rebels in Yemen.

The Houthis tried to use drones or rockets to attack Saudi Arabia almost every day over the last week. These conflicts are linked, from Hezbollah to Houthis to Iraq and Syria. Yet they are so complex and have so many different leaders and groups involved that many feel they are too complicated to understand.

Outside of simple binaries like “Hezbollah vs. Israel” or “Iran vs. America,” the story is difficult to explain. Trump’s comments about Greenland, or Boris Johnson suspending parliament, seem easier to understand. A million people protesting in Hong Kong seems more important than two Hezbollah operatives killed.

Deal of Century or an attempt to remove Palestine from world map

The United States believes that “Deal of Century” should create a strong barrier against Iran’s expansionism and must secure interests of US and Israel in the region. Arab countries should pay US$50 billion to US and Israeli companies with regard to Kushner’s plans and prosperity of Palestine. 

Several resolutions and agreements have been signed between Israel and Palestine since 1967 in the process of Peace Talks, the solution of two states, one government, and even confederation have been included in these agreements. In this regard, each of former presidents of the United States presented a peace plan to solve the problem and this time, it was Trump’s turn. 

The family of Donald Trump and Jared Kushner formulated and compiled the ‘Deal of Century’. It was not considered important that the differences between Palestinians and Israelis are a difference in the width of history and in the extent of ideological differences. 

In formulation of the ‘Deal of Century’ not attention was paid to the issue that resolving problem of Israel with the Islamic countries is not the problem that is confined or limited only to the United States or Israel.

From the political point of view, the issue is not even comprehensible for them, despite all international efforts and political initiatives taken in the recent decades, resolving this crisis has become more complicated with the passage of time. 

The situation in Palestine is tied with the Resolution 242 of the United Nations inked in 1967, stipulating that Israel must withdraw from the Golan Heights, Jordan River, Gaza Strip, and the West Bank. The resistance of Palestinian people, which began with the throwing of stone, has now been turned into resistance with the power of deterrence that owns pinpointing rockets and missiles. 

Even if the Palestinians relinquish their inalienable rights, the future of Bait Al Muqaddas (Jerusalem), as the first Qibla of Muslims and the Ascendant of the Holy Prophet of Islam as well as Palestinian citizenship within a ‘geographical area under Israeli mandate’ will turn the Palestinian problem from a territorial problem into an ideological and trans-regional problem. Such a situation would add to the desire Palestinians for more resistance and also would confront Israel with new trans-regional political and armed groups as well. 

Jared Kushner unveiled the plan of ‘Deal of Century’ to the representatives of Arab and European countries in Manama, capital of Bahrain on 25th June 2019. In this initiative plan, Kushner considered economic solution as ‘alternative’ of political solution for ending the conflict between the two parties, Palestine and Israel. In the opening remarks of the ‘Deal of Century’, he clearly put the value of land and territory of Palestine and its identity at US$52 billion. By insulting the Palestinians and their struggles, he called Palestinians as people who have lived without understanding what the peace means.

In the ‘Deal of Century’, Kushner defines Palestine as land and territory which is confined to a geographical area without a nation, government, army and also conceptual boundaries. Moreover, in his defined project, Kushner said that Palestine is an area in the West Bank and Gaza Strip that are connected with each other through railway. This area is supposed to be managed and administered by multinational companies whose staff is from the people of Palestine under the strict supervision of the United States and Israel. In Kushner’s plan, people of Palestine have been supposed as ‘unable, unhealthy’ people and emphasized, “We need a healthy economy and healthy people for empowering them.” 

The ‘government and accountability of the government towards people’ have been highlighted in formulation of the ‘Deal of Century’, while Palestinian land and territory and also Palestinian government have not been taken into consideration. In this Plan, it has only been emphasized that Palestine was established through foreign investment. In formulation of ‘Deal of Century’, Kushner has considered Palestinian land as a free trade zone than a state with clear-cut government, nation and identity. The “Deal of Century” is about turning the Palestinian nation and people into an Israeli-led development project. 

In Kushner’s plan of ‘Deal of Century’, share of Palestinian people in empowerment and reconstruction of Palestine has been considered ‘negligible and insignificant’. In this plan, share of Palestinian people to create equality and justice in the newly-established companies and lending facilities has been considered just $100 million out of US $52 billion that is supposed to be put available to US companies. 

The “Deal of Century” was unveiled in Bahrain Conference with US$52 billion investment of Trump’s family to resolve Palestinian problem. However, it should be considered that what achievements this plan would bring about for Palestine, Israel and other countries if the plan is succeeded. The “Deal of Century” will resolve the problem of Resolution 242 for Israel, allowing Tel Aviv, capital of Israel, to legalize its settlements with the geographical privileges it receives. Under the Plan, Israel can maintain its border security more than before. In addition, risk of outbreak of a civil war, from withdrawing the areas that are home to hundreds of thousands of Jews, will also be removed. 

From the United States point of view, recognizing Al Quds as capital of Israel and relocation of embassies of other countries to Jerusalem (Al Quds) is raised and it is not supposed that a state named ‘Palestine’ will be recognized as the capital of Al Quds. 

In Manama Conference, Kushner emphasized, “After ceding their land and territory, Palestinians can export their traditional foods, which have unique tastes and flavors, along with their handicrafts to the world markets.”

Interestingly, after the plan of “Deal of Century’ was unveiled it was even criticized by the US President Trump and Secretary of State Mike Pompeo. In media circles and public opinion of the United States, this plan has also been nicknamed as “Waste of Time”. 

Can sustainable peace be established in Afghanistan?

Afghans are hopeful that a peace deal between the Taliban and the United States can bring them closer to the end of the country’s ongoing devastation for more than four decades. This protracted state of war has resulted in loss of countless lives, massive displacement of people, particularly women and children, and destruction of infrastructure systems in the country. Taking into account the price Afghans have paid and continue to pay, it seems they would eagerly welcome and accept any deal that can put an end to the ongoing war, but is that really the case and is it that simple too?

For many Afghans, peace is not simply the end of war between Taliban and the Afghan army, working in the shadow of US-led troops.

They want equal rights for all citizens as described in the constitution. They also want a governance system where institutions are capable of protecting their rights. While the broad contours of the US-Taliban deal suggests a phased withdrawal of US forces, they also want a commitment by Taliban to reject internal and external militant groups operating in their territory. Though, the negotiations have been going on for months, the details remain unknown.

Afghans want withdrawal of US troops to be complimented by efforts to address the concerns of women, children, minorities, internally displaced communities, and returnees. The agreement must also include provisions to ensure equal participation of all without discrimination based on ethnicity, gender, language, religion, political, economic and social affiliations.

Since direct talks between the US, led by Special Representative for Afghanistan Reconciliation Zalmay Khalilzad, and Taliban started in late 2018, a number of experts and political analysts—many of whom are not Afghans—have said they believe Taliban have changed or reformed. They say Taliban leaders in Doha have assured them that they recognize that today’s Afghanistan is not the same as in the late 1990s when they ruled the country. However, in the eyes and experience of millions of Afghans, the Taliban’s ideology remains very much unchanged. Is there anything that can be done to bridge the confidence deficit?

After 18 years of fighting Taliban and US administration appears ready for troop withdrawal. Yet, even as the US negotiates with Taliban, the group continues to engage in terrorism and kill civilians indiscriminately. The question is whether Taliban—at both the leadership and operational levels—have the capacity, competency, and willingness to put the public good before the group’s interests. Even if the US-Taliban deal and an eventual peace agreement brokered by intra-Afghan talks results in Taliban joining the country’s political system, terrorism will remain a challenge for the country.

Countering terrorism requires more than a military response. It requires integrated political, social, and economic strategies. Ultimately, Afghanistan can only tackle its terrorism challenge when it has achieved political stability, social equity and economic growth, all of which are interconnected. There is concern that withdrawal could lead to a sudden stop of humanitarian and development aid, which would be catastrophic. As the US and international coalition troops drawdown, the international community must remain engaged to help Afghanistan build a more peaceful, inclusive society. That is the only way to reduce the high levels of violence the country has experienced for decades.

Is the international community, particularly the US, willing to stand by Afghans after the withdrawal of troops? Many Afghans fear that after the signing of a peace deal between the US and Taliban, the US will abandon the country, leading to chaos and civil war much like after the withdrawal of Soviet troops some 30 years ago. An abandoned Afghanistan could be exploited by violent extremist groups around the world and bring Afghanistan right back to where it was in 2001.

Lackluster global currency markets

Investors do not seem keen in buying EUR because they are worried about the political situation in Italy, the possibility of a recession in Germany, the prospect of aggressive easing from the European Central Bank and the ongoing risk of more tariffs from the US on Chinese goods.  This week, Italy's Prime Minister Conte resigned, turning crisis into chaos for the Eurozone's third largest economy.  Of all the EUR troubles, Italian politics has the most limited impact on the currency.  Europe is no stranger to Italian political uncertainty (they just had elections in 2018 and who can forget Berlusconi's countless scandals) and this crisis was a long time coming. Instead of rising, Italian bond yields fell because investors are hoping that the new government will be more pro-business. Talks have already begun to form a majority in Parliament, which could hopefully pave the way for a smooth transition for Matteo Salvini, who is widely expected to become the new Prime Minister.  

Recession on the other hand is a serious risk for Germany. According to the Bundesbank, Germany's central bank, the country could very likely fall into a technical recession in the third quarter. Last week they predicted that GDP could continue to fall slightly. Growth has been weak for the past year as the country posted growth in only one out of the last four quarters. Unlike Italy, Germany is a serious problem for the Eurozone. As the region's largest economy, their slowdown will be felt across the continent. Although, it became evident last week that German and EZ PMIs rose in the month of August, the uptick in activity won't stop the European Central Bank from easing.  Industrial production is weak, investor sentiments are bearish and there's a good chance that the upcoming German IFO business confidence index will decline as well. Auto sales have taken a big hit and fears of further tariffs along with a disorderly Brexit are mounting.  Just this past week, the US lawmakers urged the Trade Representative's Office to hold off imposing new tariffs on European olive oil. In November, the Trump Administration will decide whether to impose duties on European autos.  With all of these risks in mind, the European Central Bank will have no choice but to ease next month and they could deliver a bigger than expected stimulus package.  This prospect will keep EUR/USD under pressure.   

Meanwhile the US Fed is really going out of its way to downplay the need for easing.  According to the FOMC minutes, most Fed officials saw the July rate cut as a mid-cycle adjustment and not the start of an aggressive easing program.  Since then comments from policymakers such as Mester, Rosengren, George, Daly and Harker suggest that they may not support another rate cut.  On Monday, Rosengren said the US is in a good spot right now and there is no need to take action if their outlook stays on track. He stressed that the Fed doesn't have to ease simply because other countries are weak. On Tuesday, Fed President Daly said she supported the July cut but sees the labor market as strong and consumer spending. Fed President George seems to agree - she said just this morning that she's not ready to provide more policy accommodation without seeing evidence of a slowdown. Like Rosengren, she described the economy as in a good place. Fed President Harker admitted that he reluctantly supported the July rate cut and felt that "we should stay here for a while, see how things play out."  So while President Trump wants the Fed to be proactive and has taken every opportunity this week to lay on the pressure, US policymakers don't seem to be onboard with the idea.  If that's true, it would be significantly misaligned with market expectations as Fed fund futures price in 100% chance of easing next month.  Now it is all up to Jerome Powell to clear the air. He is scheduled to talk on Friday and the tone of his speech could determine the direction for USD in the weeks ahead.

Israel’s presence in US coalition in Persian Gulf can further escalate tensions in the region

Israel’s recent interest in joining the United States self-proclaimed maritime coalition is expected to further escalate tensions in the Persian Gulf region.

Iranian Foreign Ministry Spokesman Seyyed Abbas Mousavi said the Islamic Republic considers possible Israeli presence in a US-led coalition in the Persian Gulf as a clear threat to its national security and reserves the right to counter it within the framework of the country's deterrence and defensive policy.

Earlier, Israeli foreign minister had said that the regime would be part of the US-led coalition to “protect the security of the Persian Gulf”. The minister claimed that Israel was determined to stop “Iranian entrenchment” in the Middle East region and strengthen Tel Aviv’s relationship with Persian Gulf countries.

Israel’s wish to join the coalition has multiple objectives which include:

1. Containing Iran; one of the main reasons behind the Israelis’ interest in joining the coalition is to seize the opportunity to make their wish come true to contain Iran in the Persian Gulf.

2. Accompanying the US in its anti-Iran policies to boost such hostilities.

3. Ensuring the Arab countries’ security under the US protective umbrella could have other objectives.

4. The Minister has expressed hope that his country may manage to sign agreements on complete normalization of ties with the Persian Gulf Arab states as the regime’s first step.

5. The possible presence of Europeans, including France and Germany in the coalition will be equal to the violation and complete death of the Iran nuclear deal.

6. The Israelis’ presence in the Persian Gulf will foment the tensions and add to the volatility of the region, and will be considered as an element threatening Iran’s security.

7. The presence of the mentioned coalition, just like any other trans-regional coalition, is basically against the United Nations Charter.

8. By joining the collation, the Israelis seek to divert the attention from its occupation, which is in fact the main reason behind the region’s conflicts.

9. Linking the Persian Gulf security to that of the Bab-el-Mandeb in line with the Saudis’ plans is aimed at curbing Iran’s regional policies and engaging other international players in the regional developments.

10. Establishing a coalition with the leadership of the United States basically means the provision of the grounds for triggering a war in the region.

11. Although the Arab front that had worried Ben-Gurion has been eliminated due to some Arab ruler’s parallel policies with the Israelis, the Resistance Front is still making the regime lose sleep.

12. Israelis presence in this coalition will be a clear declaration of war against the Islamic Republic.