UBS On-Air: Paul Donovan Daily Audio 'Adding uncertainty in uncertain times'
The desk leans towards increased market volatility following recent geopolitical developments and Fed commentary as articulated by Paul Donovan at UBS. Trump's altered rhetoric regarding Ukraine and NATO, alongside Powell's remarks that hint at inconsistent FOMC policy direction, have injected a layer of complexity into the macro landscape. Per the full note source, the impact is evident in rising oil prices and cautious sentiment among investors, reflecting heightened uncertainty around prevailing inflation and employment dynamics. With no high-impact calendar events in the near term, traders are encouraged to closely monitor developments out of the U.S. and any further commitments from the Fed on interest rate decisions.
What the desk is arguing
The desk posits that recent shifts in geopolitical stances and central bank projections have amplified market uncertainty. Donovan highlights Trump's provocative comments on Russia, which have inched oil prices higher, yet reassurance from other Fed officials about continued rate cuts has led to conflicting signals that investors are grappling with.
The subdued reaction from investors, despite a slight rise in oil prices, underlines a general wariness about overinterpreting individual political statements. The Fed's mixed messages suggest a potential pivot, as Powell noted the balance of inflation and unemployment risks were not as clear-cut as previously assumed.
Where it sits in our coverage
Our target for the key currency pairs remains at 1.075, with a range between 1.04 and 1.12. Aligning with this outlook is jpmorgan, projecting a target of 1.10 through March 2026, while bofa contrasts with a lower endpoint of 1.04 for the same tenor.
This perspective aligns with consensus predictions but sits at the midpoint of the range, indicating we are cautious yet optimistic about the eventual recovery in currency pairs.
How other firms see it
Analysts at jpmorgan and citi maintain positions supportive of gradual recovery in currency values given the ongoing rate cut expectations. Conversely, bofa and goldman express skepticism, anticipating further declines amid unresolved inflation pressures.
Traders should keep an eye on developments in USD/JPY and the trajectory of U.S. interest rates, as these factors are likely to intersect with the broader implications of the Fed's evolving stance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Increased macroeconomic uncertainty following Trump's remarks on geopolitical tensions and Fed policy.
- 02Oil prices reflect a risk premium, subtly rising due to geopolitical developments.
- 03Cautious investor sentiment suggests a reluctance to react impulsively to political signals.
- 04Contradictory messages from Fed officials hint at an unstable economic outlook.
Market implications
Traders should monitor technical levels around 1.075 as a critical pivot point. Pay particular attention to any further Fed communications that could signal a shift in rate-cut strategies.
Risks to this view
Should inflation metrics accelerate or if the Fed signaled an end to interest rate cuts, the current positioning would require reevaluation. Surprises in geopolitical stability could also alter the volatility landscape significantly.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Wednesday the 24th of September.
Yesterday was a day when increased macro uncertainty was added into the financial markets, because who doesn't enjoy a little macro uncertainty. US President Trump made several remarks touching on geopolitical issues, in particular appearing to change the emphasis on the Russia-Ukraine war and suggesting that Russian jets violating NATO airspace should be shot down. This added a little to the oil price, but the reaction has been muted, as investors are wary of overreacting to individual statements from Trump.
US Federal Reserve Chair Powell's trip to Rhode Island led to more noteworthy uncertainty, with the Fed chair deliberately downplaying the idea that US rate cuts were on autopilot. Powell highlighted what everyone knows, inflation risks are skewed higher and unemployment risks are skewed higher as well, but highlighting the point is a shift from the assumption that unemployment definitely outweighs inflation in Fed deliberations at the moment. Assorted other Fed speakers tended to be more definite in which side of the inflation-employment divide they land.
Unfortunately they weren't consistent amongst themselves. The Fed is likely to keep cutting. The full force of inflation will not be felt until next year, but much of the inflation is beyond the Fed's ability to influence.
The signals of the labour market and indications of companies unwilling to act, given an uncertain outlook, suggest that rate cuts will be the dominant strategy. Argentinian President Mele got a reassurance from Trump that Argentina does not need a bailout and endorsement for their second term bid. They did not, however, appear to get any cash.
The World Bank and the IADB said that they would send Argentina money already pledged. The result of all of this has been a rally in Argentine assets, as the idea of US taxpayers' money being sent south has not been ruled out, and other funds are arriving more quickly. Overall, this is an instance of verbal support to try and influence sentiment.
The question for investors, as in all such situations, is whether the recent flurry of weakness is sentiment-driven or a fundamental-driven problem. Verbal intervention can help with the former, but tends to do very little with regard to the latter. On the calendar today there is the German IFO survey, another sentiment poll, although one that does appear to have a somewhat higher response rate than some survey evidence that is available.
Sources & References
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