UBS On-Air: Paul Donovan Daily Audio 'MORE MARKET ANGST'

Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Monday the 18th of May. News of an unidentified drone causing a fire at a nuclear plant in the United Arab Emirates has not helped to calm financial markets.

Given that Iran claims it wants nuclear power for civilian purposes, attacking nuclear facilities in the region might be construed as emphasising the Iranian government's position that it only wants what others already have, whatever the credibility of that particular viewpoint. US President Trump was using capital letters in social media posts about Iran over the weekend while Iranian media suggested no compromise with the United States was imminent. Oil prices are still not at the levels required to balance supply and demand and so stockpiles are having to be used.

But as stockpiles decline, the economic pressure increases. US gasoline prices remain above $4.50 per US gallon elsewhere. There are, however, reports of progress on a trade deal between the Gulf Cooperation Council states and the United Kingdom.

It's not immediately market-relevant news, but in the longer term there are important questions about where the reconstruction budget and rearmament budgets of the Gulf countries will be spent. China's April economic data was weaker than expected, with retail sales and industrial production well below the worst estimates within the forecast ranges. The retail sales number was basically static and this underscores the long-term challenge for China.

That is to say that the domestic economy has only produced the most mediocre of growth recently. However, China's domestic demand is not necessarily a major international concern, given the trade position of China is of some relevance in Southeast Asia, but less so globally. The industrial production data was bad on the headline, but somewhat mixed in the detail.

Some of the more oil-intensive sectors were dragging down the headline – metal and plastic production, for instance. Sectors that depend on external demand were often better – auto manufacturing and electronic manufacturing, for instance, saw accelerating output. Spain had local elections in Andalucía, where the far-right increased their support.

This follows far-right gains in UK local council elections and is a reminder of the general level of political risk in most major economies these days. Economic uncertainty and fear of the future, especially a fear of a loss of social status, can encourage the twin movements of scapegoat economics and prejudice politics, which naturally tend to increase support for more extreme political parties across the political spectrum. Spain's local result doesn't mean much right now – a general election is not due until 2027.

But as with the UK vote, it's a reminder that markets are going to struggle to properly price political risks. The rest of the data calendar today is quiet. There are a few central bank speakers kicking around – the Bank of England and the European Central Bank are both being represented.

But central banks need information on second-round inflation effects to make informed decisions on interest rates. And we do not have that information as yet. That means either we get bland comments or we get uninformed comments.

Both are, of course, possible. That's all for today. Have a good day.

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