UBS Morning audio comment: Oil and bonds
The FX desk is positioning for sustained volatility in oil prices which could impact global economic conditions, particularly in relation to bond yields and consumer sentiment. Per the full note from UBS, oil prices are on the rise, with US diesel prices remaining near historical highs amidst diplomatic withdrawals from key markets like Saudi Arabia. This backdrop suggests persistent inflationary pressures that may influence both consumption patterns and bond yields in the near term, leading traders to recalibrate their positioning with a watchful eye on ongoing geopolitical developments.
What the desk is arguing
The desk argues that the continued rise in oil prices, coupled with geopolitical instability, is likely to maintain inflationary pressures in the economy. Per the full note , US retail diesel prices are lingering at elevated levels, which has not been mitigated by changes in administration policy. This scenario could keep consumer spending robust in the short term while increasing the risks for next year.
Additionally, higher bond yields will remain a focal point for market participants, with 10-year French government bonds crossing the 5% threshold, which is often a psychological barrier for investors. The desk sees this as a signal of an ongoing normalization in global bond yields, indicating a potential pivot in investment strategies as market participants adjust to these economic realities.
The alternative read would be that if oil supply dynamics shift unexpectedly, leading to a decrease in prices, the long-term inflation expectations may need revising downward, which could alter current consumer spending projections and bond investor sentiment.
Where it sits in our coverage
Based on our internal consensus, the current target for USD/EUR is set at 1.075, with a range identified between 1.04 and 1.12. Notable firms providing forecasts include: - jpmorgan: target 1.10 by Mar26 - bofa: target 1.04 by Mar26
The desk's view is aligned with jpmorgan, signaling that the expected uptick in oil prices could support higher USD/EUR levels. Should inflation remain persistent due to rising commodity prices, it could further support the upper end of this range.
How other firms see it
Firms with aligned views include jpmorgan, which anticipates similar pressure from oil prices on USD valuations. Conversely, bofa presents a contrary outlook with lower targets, anticipating that decreasing consumer purchasing power may stem from sustained high energy prices.
Market watchers should also consider related pairs like USD/CAD, which is more directly impacted by fluctuations in oil prices, as well as upcoming inflation indicators that may respond to energy costs.
What the calendar says
There are no imminent high-impact events on the calendar that could sway trader sentiment in the immediate future. However, ongoing geopolitical events and their aftermath could indirectly affect market dynamics moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Oil prices remain high, influencing inflation and economic sentiment.
- 02US diesel prices are near record levels, without signs of relief.
- 03Bond yields are rising, indicating possible shifts in investor sentiment.
- 04Geopolitical factors, especially in the Middle East, remain a critical risk to market stability.
Market implications
Traders should focus on the psychological thresholds in the bond market, particularly the French 10-year yield crossing 5%, which may signal sentiment shifts. Additionally, fluctuations in crude oil prices could influence USD/CAD dynamics, making it crucial to monitor oil-related news and geopolitical developments.
Risks to this view
A sudden decrease in oil prices due to improved supply dynamics or successful diplomatic interventions could invalidate the current bullish outlook on inflation and economic stability, forcing a reassessment of bond yield trajectories and consumer spending forecasts.
Oil prices are not showing much sign of moderating, and the US has withdrawn some diplomats from Saudi Arabia. View this email in a web browser Oil and bonds UBS morning audio comment by Paul Donovan Oil prices continue to drift higher. US retail diesel prices are still near all- time highs, with no sign of mitigation from US administration policies.
The news that the US is asking some of its diplomats to leave Saudi Arabia is not necessarily a positive signal about regional stability. Consumers should continue to consume despite the energy costs for the remainder of this year. Next year is when risks increase.
US initial claims enliven an otherwise lacklustere data calendar. However, this data is not really suited to explaining the shifts in the modern labour market, as it does not properly capture weaker hiring (new entrants to the labour market being missed in the numbers). French business sentiment is no more reliable than other countries’ sentiment polls.
The data likely predates the recent protests, but protests do not necessarily have much of a real economic impact. Retail spending may take place at a different time, and tourism might be affected, but otherwise the economy tends to carry on. Bond yields will remain in focus— – French 10- year yields rising above 5% animates politicians because a round number is involved.
However, global bond yields today tend to represent economic normality, after several years of bond holders getting less than they deserve. Read important disclaimer 〉 Listen to today's Thursday, 22 October update Listen now 〉 Recommended content Listen to past recordings in Paul Donovan's daily updates 〉 Nobel Perspectives - Exploring the questions that shape our world 〉 You have received this email because you registered at . Unsubscribe #end --> | Edit profile Publication data: UBS AG, P.O.
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