UBS On-Air: Paul Donovan Daily Audio 'Back and forth on trade'
The desk believes that the recent easing of trade tensions between the US and China will positively influence financial markets, particularly equities. This sentiment is echoed in UBS's analysis, which highlights President Trump's apparent retreat from a confrontational stance and the upcoming trade talks as significant catalysts. Additionally, China's economic performance appears resilient, with GDP growth slightly exceeding estimates despite ongoing tariff-related uncertainties. While positional data on specific currency pairs remain thin, traders should keep watch on how these developed narratives influence sentiment across asset classes.
What the desk is arguing
The desk argues that a thaw in US-China trade relations could result in a buoyant environment for financial markets, particularly for equities. Per the full note from UBS, President Trump's recent remarks suggest a pivot towards cooperation rather than conflict, preparing the ground for new trade discussions this week.
Supporting this outlook, UBS noted that China's third-quarter GDP growth slowed to 6.0%, slightly above expectations, indicating that the economy remains robust despite tariff pressures. The analysis underscores that the real economic impact of these tensions has been less pronounced compared to market reactions.
The alternative view would be that persistent uncertainties surrounding trade could continue to weigh on market confidence, stirring volatility across asset markets, particularly if negotiations falter unexpectedly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent US-China dialogue signals potential easing of trade tensions.
- 02China's GDP growth slightly exceeded expectations at 6.0% despite tariff challenges.
- 03Equities are expected to react positively to improved trade sentiment.
- 04Ongoing negotiations this week will be crucial for market direction.
Market implications
Watch for any market movements around equity indices, particularly if the forthcoming US-China trade talks yield positive outcomes. A strong performance in US equities could further solidify this thesis, pushing USD-related pairs to new levels.
Risks to this view
A significant reversal could occur if the trade discussions do not yield favorable outcomes, leading to renewed antagonism from either side. Additionally, a sharp downturn in China's economic indicators could reignite fears of a broader slowdown, negatively affecting market sentiment.
This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 20th of October. The financial markets have been shifting their expectations around trade, with US President Trump seemingly sounding a retreat over antagonism towards China.
New trade talks between the US and China are scheduled to take place this week. The pattern of trade tensions coming and going is now fairly well established and the norm is for the US to climb down from its more antagonistic positions. However, the impact of this policy volatility does seem to be more significant for financial markets than for the real economy.
The uncertainty has no doubt done damage to the real economy, but economic reactions are definitely less dramatic than those of the equity markets. China's third quarter GDP slowed a little less than had been expected. This period covers the uncertainty of US tariffs.
It comes after the stockpiling that predated the first wave of tariffs, but it includes some stockpiling ahead of the second wave of tariffs. Stockpiling has made a difference, but its timing has not been evenly distributed. Different industries seem to have stockpiled at different times.
China has, of course, continued to sell to the rest of the world as normal, and there has undoubtedly been some tariff avoidance with rerouting going on. Industrial production in China was a little stronger and investment was somewhat weaker. There's no reason to suppose that China will miss its growth targets for this year.
China's official GDP almost never undershoots the official growth target. News reports last week suggested that Italy will be increasing its flat rate tax on wealthy foreigners again at this time with a fairly sizable hike to 300,000 euros. The news is not necessarily market moving, but it is a reminder that the combination of record levels of wealth with high levels of government debt make it inevitable that governments will seek to mobilize that wealth to finance fiscal policy one way or another.
It does perhaps lessen the concerns over debt levels as it suggests that means can be found to finance borrowing over time. The data calendar is relatively quiet. The U.S. government shutdown is now the third longest in history, although there is the exciting prospect of consumer price inflation data being published on Thursday to enable the government to calculate the indexation required for those parts of government spending that automatically rise in line with the CPI numbers.
There is the EU current account data for August scheduled, but even at a time of heightened trade tensions, this is not going to agitate markets at all. That's all for today. Have a good day.
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