Ahead of the curve with Ulrike Hoffmann-Burchardi
The desk interprets Ulrike Hoffmann-Burchardi's insights as indicative of upcoming market volatility, particularly influenced by the recent tariff announcements and investor sentiment surrounding high equity valuations. Per the full note source, market participants are hesitant to enter at perceived peaks, given the uncertainty surrounding the U.S. and global economic growth. The desk highlights a critical take from Hoffmann-Burchardi's discussion around the historical tendency for the S&P 500 to offer average returns that outpace Treasury bills during periods of high valuations, suggesting a stronger than expected underlying resilience. This sentiment contrasts sharply with existing doubts in investor circles where worries about sustained economic growth may overshadow tactical trading opportunities in equities and FX pairs alike.
What the desk is arguing
The desk frames Hoffmann-Burchardi's commentary as a potential precursor to increased volatility in the FX markets, particularly as tariff escalations pose risks to economic perceptions. Investors are clearly cautious, but the statistical evidence cited about S&P performance suggests a disconnect between market entry points and subsequent gains.
Supporting this premise, Hoffmann-Burchardi notes that it typically takes an average of 105 days for significant pullbacks to materialize after new highs, a period characterized by above-average returns. The environment suggests potential upward pressure on equities, which could spill over into FX trading behavior, especially against pairs sensitive to U.S. economic sentiment.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, within the range of 1.04 to 1.12, with specific targets from the following firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - goldman: 1.12 (Mar26)
This perspective aligns with jpmorgan, which shares a similar outlook, while diverging from bofa, which anticipates a weaker Euro. Our positioning is consistent towards the higher end of the forecasted spread, reflecting inherent risks in lower valuation expectations for the Euro amidst tariff uncertainties.
How other firms see it
Most firms align on the premise of cautious optimism, particularly jpmorgan and goldman, which see potential support for higher equity markets. Conversely, bofa presents a more pessimistic view, highlighting the tariff issues as fundamentally undermining growth forecasts.
Traders should closely watch pairs like EUR/USD and USD/JPY, as the trajectories for these currencies will largely reflect responses to U.S. tariff policies and prevailing economic data trends leading up to the next announcements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Heightened market volatility is anticipated due to recent tariff announcements and lingering uncertainties.
- 02Historical data suggests that investing at market peaks can yield higher returns, countering current investor skepticism.
- 03The connection between equity performance and FX sentiment is critical during this period of uncertainty.
- 04Cautious trading approaches may lead to missed opportunities if the market continues on an upward trend.
Market implications
Market participants should focus on the potential influence of U.S. tariff policies on equity and FX markets, with particular attention to the EUR/USD level and current positioning of investors. A level around 1.075 may serve as a pivot point for traders as volatility emerges.
Risks to this view
A clear catalyst for market reversal would include a significant negative economic data release or escalated tariff actions that could exacerbate market fears about growth, particularly if they come as a shock to current expectations.
Hello and welcome to Ahead of the Curve, where we look at the most important market drivers for this coming week and for opportunities beyond the consensus. My name is Ulrike Hoffmann-Borchardy, CIO Americas and Head of Global Equities for UBS Wealth Management. This week, we'll have to brace ourselves for volatility.
We'll talk about the tariff headlines that hit this weekend and also the other most relevant data points this coming week. But before that, I'd like to share some takeaways from client meeting over the past few weeks. The consensus across three continents seems to be one and the same.
Investors remain skeptical about the U.S. and about U.S. and global economic growth. They find it hard to rationalize the fast and furious rebound in the equity markets. With all the lingering uncertainty, they prefer to sit on the sidelines.
Who wants to buy at an all-time high? But I think in a market that is increasingly driven by emotions, not just fear and greed, but also partisan sentiment. It's important to use data as a rational anchor.
So here are the stats on buying the S&P 500 at an all-time high. It takes on average 105 days to get a pullback of 5% or larger. During that time, the S&P has actually higher returns than T-bills.
So waiting for a pullback is costly. And on average, the data tells us to buy the peak. It gets no surprise that my former boss, Paul Tudor Jones, likes to say, the trend is your friend.
So the question is, is there a fundamental reason for the equity market to pull back? High valuations alone are not sufficient. They tell us how far the market could fall, but they don't tell us when.
For this, we need a clear catalyst. We need a negative surprise, something that is worse than expectations. The tariff escalations over the weekend fall into this category.
Trump levied 30% tariffs on both Europe and Mexico. At face value, the Europe headline would be a big deal. Mexico, not so much.
Outside of the sectorial tariffs, only 10% of the imports from Mexico should be subject to these new taxes. For everything else, Mexico enjoys the benefit of the USMCA and also its status as a most favored nation. For Europe, the situation is different.
There, the headline came as a negative surprise. And that's because the prior headlines had suggested that the European Union and the US were quite close to reaching a trade deal. And then the announced tariffs of 30% were in fact higher than the 20% announced on Liberation Day.
So equities are likely going to be lower as a result. But we think now, with the 30% that are looming on August 1st, both parties are more incentivized to reach a deal. Now let's take a look at the other data points that are market relevant this week.
The key day is tomorrow, Tuesday, July 15th. We get the June CPI print at 8.30 in the morning. Expectations are for 30 basis points increase year over year.
Where do we stand? We think tariffs could have a delayed impact on the prices of imported goods. And we also think that shelter inflation continues to come down.
And that could prove to be an offset in the overall CPI print. So those two factors alone could mean that inflation comes in later than expected. And that would mean a bid to both the US equity and fixed income markets.
On the same day, we're going to have bank earnings, JP Morgan, Wells Fargo, and Citi. We recently upgraded US financials, and we think there's more room to run. Three reasons.
A steepening yield curve is positive for net interest margins. Also, capital market activity is picking up. M&A volumes are up globally 26% year over year.
And the IPO market is starting to thaw. And lastly, there's a tailwind from deregulation, a decrease in SLRs will free up more capital for banks and also with treasury market liquidity. So we think financials will kick off an earnings season that is likely better than expected with further tailwinds to come in the later part of the year.
I'd like to leave you with three takeaways. One, expect more downside volatility from escalating tariff talks. Two, the fundamentals of bank earnings and more benign inflation could prove to be positive offsets.
And lastly, an all-time high in the equity market in and by itself is not a sufficient reason to refrain from investing. We suggest using volatility to build up equity exposure. Thank you for listening.
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