UBS Morning audio comment: Scapegoat economics
The current economic climate is fostering a phenomenon referred to as scapegoat economics, where fear and uncertainty lead individuals and governments to seek blame for prevailing financial hardships. Per the full note from UBS's Chief Economist Paul Donovan, while China's third-quarter GDP has officially printed at 4.5%, this figure masks longstanding structural weaknesses within the economy, notably reliance on exports rather than domestic consumption. In this environment, political tensions, particularly in the context of U.S.-EU disputes over technology and increased protectionism, could intensify market volatility as investors react to scapegoating narratives. Understanding these dynamics amid upcoming geopolitical events will be crucial for strategizing FX positions.
What the desk is arguing
The desk emphasizes that scapegoat economics is increasingly shaping market narratives, as highlighted by Donovan. China's modest GDP figures juxtaposed with its ongoing export-driven growth narrative illustrate how concerns for the future fuel blame directed at external factors, particularly in U.S.-China relations.
Donovan further points out recent protests in France as indicative of social unrest that could amplify political risks ahead of potential elections, which adds layers of uncertainty for investors. The lack of impactful immediate economic data releases denotes a quiet calendar, yet the geopolitical landscape remains charged.
Where it sits in our coverage
Our current consensus target for the relevant FX pairs includes a range of 1.04 to 1.12, based on coverage from several firms. Notably, we have targets from: - JPMorgan: 1.10 (Mar26) - BofA: 1.04 (Mar26) - Goldman Sachs: 1.12 (Mar26)
This view aligns moderately with JPMorgan, which also reflects concerns over protectionism and its impact on currency dynamics; however, the call leans towards the upper bound indicated by Goldman Sachs, suggesting a less conservative outlook.
How other firms see it
Firms like JPMorgan and Goldman Sachs appear aligned in their understanding of global economic tensions and their implications for foreign exchange. In contrast, BofA presents a more cautious scenario that anticipates a stronger dollar amid ongoing international disputes.
Key currency pairs to monitor in this context include the EUR/USD trajectory, particularly as it intersects with the ECB’s upcoming discussions, and the USD/JPY trend, which may reveal shifts in risk sentiment influenced by geopolitical tensions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Scapegoat economics is on the rise, driven by fears related to geopolitical tensions and domestic economic challenges.
- 02China's GDP growth calculation does not reflect the underlying economic sentiment, with exports as the primary growth driver.
- 03Ongoing protests in France may reflect deeper socio-economic issues and impact upcoming political processes.
- 04Investors should remain vigilant of narratives that could drive volatility in FX markets.
Market implications
Traders should watch potential movements in the EUR/USD and USD/JPY pairs as they react to the impacts of scapegoat narratives and international tensions. Key levels to monitor are 1.10 for potential resistance in EUR/USD and shifts around 145 in USD/JPY if the sentiment changes.
Risks to this view
The primary risk to this outlook includes a sudden shift in trade policy or economic data that could positively surprise markets, undermining the narrative of international blame and leading to a stronger demand for currencies traditionally viewed as safe havens. Additionally, unexpected stabilization in Chinese domestic consumption could alter perceptions of its growth trajectory.
Fear of the future encourages scapegoat economics, when people look for someone else to blame. View this email in a web browser Scapegoat economics UBS morning audio comment by Paul Donovan China’s officially reported third quarter GDP growth was 4.5% y/y. That means that this year’s officially reported growth is likely to hit the officially set growth target.
However, despite a stronger September China retail sales number, the domestic economy remains lackluster. Exports remain the growth driver. China has been fortunate that US companies have been adept at avoiding some tariffs, though ongoing economic nationalism (a form of scapegoat economics) threatens this pattern of growth.
There is an EU-US dispute over communications technology, with the EU looking to limit access to the spectrum to European companies, and the US Starlink accused of limiting access in Ukraine for political purposes. This is part of a wider economic nationalism and lack of trust suggests EU defense spending is likely to be increasingly domestically focused. France experienced a different form of scapegoat economics with violent protests over the weekend.
Protests are not unknown in France, but sensational images are peculiarly suited to the social media age, implying there may be more international focus than for similar protests in previous decades. Investors may speculate on the implications for next year’s presidential elections, but it is probably too soon to say. The calendar is quiet.
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