UBS On-Air: Paul Donovan Daily Audio 'Any bond traders over 40?'
The desk argues that rising crude oil prices, driven by geopolitical tensions, are causing fluctuations in US gasoline prices and may influence Treasury yields. Per the full note from UBS, this volatility highlights a bifurcation between crude and refined product prices, suggesting inherent market weaknesses. Additionally, the current bond market dynamics, especially in the context of investor sentiment and the historical norm post-2008, indicate that many traders in this environment might not be fully equipped to navigate these shifts. While there is consistent pressure from energy prices, the anticipated movements in bond yields remain a key concern for traders managing their FX positions.
What the desk is arguing
The desk asserts that geopolitical instability in the Gulf, particularly actions involving Iran, is exerting upward pressure on crude oil prices, which indirectly affects gasoline prices in the US market. Per the full note from UBS, while crude oil has seen significant price increases, gasoline prices have been slower to reflect this change, implying a disconnect that traders should monitor closely.
Furthermore, the desk points out that this situation could have broader implications for global bond yields, which have been increasing partly due to energy price pressures. Donovan noted that elevated yields, against a backdrop of historical low debt levels, are prompting investor concerns and may influence the Federal Reserve's future monetary policy decisions.
Where it sits in our coverage
Our consensus target for the EUR/USD is set at 1.075, within a range of 1.04 to 1.12, with notable targets from key firms: - jpmorgan at 1.10 - bofa at 1.04
This outlook suggests that the desk’s perspective aligns with the upper bounds of our current forecasts, making it a relevant consideration for FX traders looking at transitory moves resulting from rising oil prices.
How other firms see it
Aligned with our perspective, jpmorgan anticipates stability in the currency pairs given the geopolitical context and its impact on energy prices. In contrast, bofa appears to take a more cautious stance, suggesting possible weakness in the face of potential economic slowdowns influenced by energy costs.
Traders should pay particular attention to the EUR/USD trajectory as it will likely reflect shifts in both sentiment and underlying economic indicators like inflation trends and central bank responses, particularly from the Fed.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Rising crude oil prices are affecting gasoline prices and investor sentiment.
- 02Treasury yields are rising amidst geopolitical instability and investor concerns.
- 03Many bond traders today lack the historical context of previous market conditions post-2008.
- 04The current market may be less stable than it appears, prompting reassessment of trading strategies.
Market implications
Traders should closely monitor crude oil price movements, as a sustained increase could lead to further volatility in US Treasury yields. The 1.10 level on EUR/USD may become a focal point, particularly if crude prices remain elevated or if geopolitical tensions escalate further.
Risks to this view
A significant catalyst that could invalidate this call would be a de-escalation of tensions in the Gulf region, leading to a sharp drop in crude oil prices. Additionally, a strong pivot from the Federal Reserve, indicating stable or lower rates, could reverse current trends in both bond yields and FX pairs.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 2nd of September. Crude oil prices have risen further, with Iran hitting tankers in the Strait of Hormuz and the US responding with missile strikes.
US gasoline prices are edging higher, though their move is not as dramatic as the crude oil price, because refined product in the United States didn't drop in the same way as crude oil prices did. Investors' optimism bias is being challenged by the current environment, and US President Trump's position is to seemingly ignore very low approval ratings and the possibility of the Republicans losing control of Congress, to the extent the current situation can be described as having control. Investors are blaming the administration for the higher price of gasoline, and that had given investors hope that domestic political pressures would sway Trump to sue for peace.
The oil price is one of the factors being blamed for the rise in Treasury and other global government bond yields. Sensational headlines can be written about these moves, but it is worth reflecting that since the global financial crisis in 2008, the global bond markets have been unusual. It's the recent past that seems to be more of an aberration relative to history.
It's also worth reflecting on how many of today's bond traders were working in the financial markets prior to the global financial crisis era. There are bond traders over 40 years old, of course, but are they a majority of the bond market? Nonetheless, higher bond yields with elevated, if still well below record, levels of debt from governments are causing concerns.
If the US central bank were run by a Greenspan, Bernanke or Yellen, then the words of the Fed chair would go a long way to controlling the longer end of the yield curve. This situation is not, however, the case today. Today, we get the release of the Fed's beige book of economic anecdote, the Economist's version of Hello Magazine.
At a time of structural change, economic anecdote can have more value. But at a time of sensationalism, distorting surveys and political polarisation biasing anecdotal evidence, there are also other considerations. Nonetheless, with heightened uncertainty risk in financial markets, anything seen swaying US policymakers' decisions is going to be significant.
The US is giving July factory orders data and final July durable goods numbers. Factory construction in the United States continues to slow. The Biden era factory building boom has faded relatively rapidly.
Factory building does not determine the output of the factory sector, of course. The stock of existing factories is far more important than the building of new ones. However, construction is one indication of the confidence US manufacturing has in the future.
There are Italian July consumer price data released, which is not likely to excite investors. The August euro area consumer price inflation data came in below the European central bank's projections for the third quarter, which do need to be updated. But it is, of course, still above the ECB's target.
Critically, second round effects, a wage price spiral or profit-led inflation, are not in evidence. These are things that a central bank can actually influence with monetary policy. Increasing interest rates does not affect a supply shock story unless the rate increases push the economy into recession by bringing about a collapse in demand.
That's all for today. Have a good day. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC.
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