UBS On-Air: Paul Donovan Daily Audio 'Firing, not ceasing'
At a Glance
Paul Donovan argues that despite US claims of a ceasefire with Iran, continued military actions undermine that narrative, but markets are resilient due to optimism bias and Trump's low approval ratings limiting escalation risk. The market reaction remains muted as investors focus on US domestic politics and upcoming PCE data. Per the full note source, a 34% approval rating historically pressures politicians to moderate foreign policy.
Key Takeaways
- 01US ceasefire claim contradicted by continued military actions by all parties
- 02Trump approval at 34% (Economist tracker) provides political check on escalation
- 03Market reaction muted due to optimism bias and resignation
- 04PCE data today expected to show consumer resilience despite higher gasoline prices
Full Analysis
What the desk is arguing
The desk frames the US ceasefire claim as inconsistent with ongoing military actions—US strikes on Iran, Iran on Kuwait, Israel on Lebanon, and Trump's threat to "blow up" Oman. Per the full note source, this volume of activity suggests "a lot of firing and relatively little ceasing." Markets have reacted negatively but in a muted fashion, supported by an optimism bias and resignation that such conflict is inevitable.
Key supporting evidence comes from Trump's approval rating dropping to 34%, according to The Economist tracker, lower than any point in either term and below Biden's nadir. A separate poll shows more voters blame Trump for the affordability crisis than any other factor. The desk suggests these political dynamics may restrain further escalation, as Republican lawmakers take note ahead of midterm elections.
The counterfactual the desk implicitly rejects is that the conflict could escalate to a full-scale war without political restraint. The alternative read—that Trump's approval rating immunizes him from political consequences—is dismissed because "approval ratings this low matter politically" and will influence congressional behavior.
Market Implications
The muted risk-off move suggests investors are pricing a low probability of sustained conflict. Watch crude oil for a break above recent highs if geopolitical tensions spike again. FX volatility may stay suppressed unless PCE data surprises or a new military incident occurs.
From the original
In the past day, the US fired on Iran, Iran fired on Kuwait, Israel fired on Lebanon, US President Trump threatened to “blow up” Oman. The US administration says the ceasefire (sic) is holding. Market reactions have been negative but muted. Investors are eyeing US domestic politi
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In light of recent US air strikes against Iran, the desk observes that markets are not reacting strongly, indicating a prevailing focus on the Iranian perspective rather than that of the US. Per the full note by UBS, the strikes seem to reinforce the belief that a negotiation resolution is not imminent, which contrasts with bullish sentiments implied in US President Trump's communications. This muted reaction may indicate that traders had already priced in a less optimistic outlook for the geopolitical situation. Additionally, the focus on UK inflation reads does not suggest immediate rate hikes from the Bank of England, given the lack of retail price pressure, which may further influence the FX landscape as traders weigh geopolitical risks against economic indicators.
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The desk interprets the recent developments regarding Middle East peace negotiations as a moderate positive for risk assets, but remains cautious due to insufficient confirmation from credible sources. According to UBS's Paul Donovan, a temporary ceasefire between Israel and Lebanon has been established, reducing immediate geopolitical tensions; however, markets are yet to incorporate U.S. President Trump's optimistic claims about Iran's compliance with U.S. terms. As investor appetite remains subdued, particularly evident in Asian equity markets, uncertainty persists around central banks' policy responses to this evolving narrative. Per the full note [source], central banks, like the Bank of England and the ECB, are still adopting a wait-and-see approach, signaling no imminent shifts in monetary policy at this moment.
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