UBS On-Air: Paul Donovan Daily Audio 'Back up'
The desk interprets the recent spike in Brent crude oil prices, now above USD 90 per barrel, as a reflection of heightened geopolitical tensions following the expiration of the US-Iran truce and threats from President Trump. Per the full note source, this market response underscores concerns about the ongoing closure of the Strait of Hormuz and the potential for escalating conflict. As US gasoline and diesel prices remain considerably higher than last year, there is a growing sentiment of an affordability crisis that could influence political and economic sentiment in Washington. This sets the stage for significant market implications, particularly in the energy sector and its knock-on effects on currencies sensitive to these developments. The desk will monitor how the market absorbs these geopolitical signals while navigating global economic data, notably from China, which appeared weak recently.
What the desk is arguing
The desk sees Brent crude’s rise above USD 90 as indicative of geopolitical risks that have not only been ignored but are now exacerbating price volatility. President Trump's refusal to extend the US-Iran truce, combined with the threat of military action in Oman, signals increased uncertainty in oil supply chains. Per the full note source, market reactions are more reflective of concerns surrounding oil supply, particularly through critical choke points like the Strait of Hormuz.
Furthermore, US retail fuel prices have shown a dramatic yearly increase, supporting the narrative of an impending affordability crisis for consumers. These dynamics suggest a potentially responsive shift in US policies, which could further influence market optimism or pessimism depending on how they unfold.
Where it sits in our coverage
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How other firms see it
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What the calendar says
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Key takeaways
- 01Brent crude oil has surpassed USD 90 per barrel amid geopolitical tensions.
- 02The expiration of the US-Iran truce raises questions about potential supply disruptions.
- 03Higher retail gasoline prices may drive political responses in the US.
- 04Weak economic data from China adds complexity to the global growth outlook.
Market implications
Traders should observe key levels around USD 90 for Brent, as further price increases could amplify the call for policy responses from the US government. Also, keep an eye on adjustments in positioning as energy prices reshape economic prospects.
Risks to this view
A de-escalation in US-Iran tensions could alleviate fears around oil supply disruptions, while significantly improved economic data from China might shift perceptions about global demand. Additionally, any substantial changes in US retail fuel prices could alter political dynamics.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 6.30 in the morning London time on Tuesday the 18th of August. The benchmark Brent crude oil future is back above $90 a barrel.
US President Trump has refused to extend the truce under the Memorandum of Understanding, so memorably signed at the Palace of Versailles. Trump also suggested bombing Oman if they got in the way of a peace deal with Iran. From an investor perspective, the truce was not really in operation as Iran's closure of the Strait of Hormuz is still very effective.
The market reaction reflects the prospects for reopening the Strait rather than any change in the current situation. US retail gasoline and diesel oil prices remain substantially higher than they were a year ago and that will continue to feed the perception of an affordability crisis in the United States. Any further rise in these prices might again change the tone coming out of Washington.
There has been a loose correlation, at least in the past, and that would allow the market's optimism bias to reassert itself. Yesterday's delayed release of China's economic data does not allow too much of an optimism bias. The numbers from China continue to show a lacklustre economy.
Production and domestic consumption were both weaker than expected. The latter, represented by retail sales, was being dragged lower by poorer goods sales. China's Premier Li urged officials to offer economic support measures.
However, it's not clear how much of the second quarter slowdown is an actual slowdown versus how much is just representing a more precise reporting of the economic data. That does matter when considering the effectiveness of policy responses. As students of Japan's economic history know, it is often easier to turn around a cyclical than it is to raise growth that has, in reality, been languishing for a longer period of time.
The UK is offering employment data today, which is a politically charged topic, but something that is still being plagued by quality issues. Recent revisions to data mean that the numbers of people deemed to be unable to work from illness have been cut significantly. This had previously been thought to be a major issue in the UK economy, and it turns out is not.
Part of the problem here is that the UK has arguably experienced structural change faster than other economies. Tax data shows the rise of side hustles, for example, which complicates the perceptions of employment. We've imported export price data coming out of the States.
This is not necessarily that helpful for investors anymore. The new tariffs are very unlikely to affect import prices. That is to say, companies exporting to the States are not expected to discount in order to offset US tariffs.
The main distortion on import prices will be the crude oil price, and refined oil products will offer some distortions to the export prices as well. That's all for today. Have a good day.
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