UBS On-Air: Paul Donovan Daily Audio 'As you were'
The desk interprets recent geopolitical tensions between Israel and Iran as a crucial market focal point, with both nations signaling a potential ceasefire despite ongoing missile exchanges. Per the full note source, this has led to a stabilization of oil prices which have erased earlier upticks that could have signaled wider economic implications. As the Federal Reserve navigates rising inflation, the possibility of rate cuts has emerged, adding complexity to the investment landscape. This duality of geopolitical risk and central bank policy will be central to traders in the coming weeks.
What the desk is arguing
The desk frames the current geopolitical situation as a critical component of market dynamics, particularly in relation to energy prices and U.S. monetary policy. As per the UBS commentary, despite missile exchanges between Iran and Israel, market participants appear to interpret the situation as stabilizing, with oil prices returning to levels seen weeks prior.
Supporting this perspective, the commentary noted a dovish tone from the U.S. Federal Reserve regarding possible rate cuts amid rising inflation and slowing growth signals. This is marked by a sequence of economic indicators showing rising inflation followed by dampened consumer spending, indicating that the Fed might indeed be ready to act pre-emptively.
Where it sits in our coverage
Our consensus target for relevant currency pairs is currently set at 1.075, with a range spread from 1.04 to 1.12. Notable firm positions include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's analysis and outlook are significantly aligned with the narrative from jpmorgan, suggesting a view towards strength within that upper target bound, while diverging from bofa, which remains more cautious.
How other firms see it
Aligned firms such as jpmorgan are echoing our outlook, citing a stabilization in oil prices impacting macroeconomic conditions. Conversely, bofa maintains a more bearish view, focused on potential risks from ongoing geopolitical tensions.
For currency traders, the trajectory of USD/JPY may be worth monitoring, as shifts in Fed policy resonate through the market, affecting overall sentiment and positioning. Additionally, fluctuations in oil prices will keep influencing currency valuations with a linkage to energy dependency in the broader economy.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Geopolitical tensions between Israel and Iran are stabilizing, with potential ceasefire implications for oil prices.
- 02US Federal Reserve hints at possible rate cuts despite rising inflation, introducing complexity in monetary policy.
- 03Current consensus targets show divergence, indicating differing viewpoints among major financial institutions.
- 04Watch USD/JPY for market implications of Fed policy and its interaction with geopolitical risk.
Market implications
Traders should watch oil price movements closely, particularly any shifts below $70/barrel as that may signal broader economic slowdowns. Additionally, any indications from the Federal Reserve during upcoming meetings could prompt significant adjustments in market positioning.
Risks to this view
An escalation in the Israel-Iran conflict could sharply drive oil prices higher, complicating the Fed's rate cut strategy. Should inflation unexpectedly drop or economic growth indicators show an upward trend, that may challenge the current dovish expectations set by the Fed.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Tuesday the 24th of June. Overnight, US President Trump declared that Israel and Iran had agreed a ceasefire between themselves.
Israel and Iran have continued to exchange missile attacks since that announcement, but Iran has effectively said, if Israel stops, we will stop. And according to the BBC, the last Israeli attacks on Tehran took place at around 4am local time. Israel has yet made no comment.
However, this is all enough for markets and the oil price has dropped back to the levels of a couple of weeks ago. That means that the economic effect of the briefly higher oil price, assuming the situation does not change, is unlikely to be noticeable in the data. Markets are at this stage unlikely to care too much about Iran's nuclear program, the location of enriched uranium, and so forth.
These things certainly do matter in a political sense, but as with North Korea, the nuclear threat is regarded as an extreme tail risk that markets do not wish to wait. Markets may also be getting some support from a rather dovish set of US Federal Reserve remarks overnight. The general sense was that rate cuts are possible while inflation is still rising, and rate cuts could also come as soon as the July meeting, though that is unlikely to be a majority position at this stage.
The idea of cutting rates when inflation is rising is a move away from the rather unfortunate policy trap of data dependency, as it implies a more forward-looking policy. The story in the United States is a sequence of rising inflation, then falling real incomes, then slowing consumption, then slowing hiring in the labour market, then slowing growth. So if the Fed is prepared to anticipate the slowing growth part of that sequence, there should not be a problem with having falling rates while inflation continues to rise, as long as there is confidence that the growth slowdown will stem that rise in inflation within a reasonable timeframe.
Fed Chair Powell is in front of Congress today. The quality of questions from members of the House Committee on Financial Services is not always that high. There is occasionally a suspicion that members of Congress are more interested in generating soundbites for social media for their voters back home, rather than having a serious discussion about policy.
There's also a pontification of other central bankers from the Federal Reserve, the European Central Bank and the Bank of England. No fewer than 16 other individuals are speaking today, including ECB President Lagarde and Bank of England Governor Bailey. ECB Chief Economist Lane is speaking twice, but that of course is fine.
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