UBS On-Air: Paul Donovan Daily Audio 'Bewitched, bothered, and bewildered'
The desk highlights that current investing challenges are exacerbated by market reactions to social media rather than concrete information, presenting a unique volatility risk. Per the full note source, this environment leads investors to seek potential leading indicators of narrative shifts, whether based on verifiable data or the subsidiaries of 'fake news'. This situation is further underscored by the notable oil market trades made prior to significant social media statements from political figures, which suggests an emerging pattern of speculative behavior influenced by narrative changes rather than economic fundamentals.
What the desk is arguing
The desk asserts that the current market landscape's susceptibility to social media narratives is a critical factor for traders to consider. This framing, as noted in the UBS commentary, suggests that investors are likely to hedge their positions based on perceived narratives rather than objective economic data.
This is particularly noteworthy given that two substantial oil market trades were executed right before President Trump's recent social media post, indicating that traders may be preemptively positioning themselves for potential narrative shifts from the administration. The implications of this behavior are vital for risk management strategies, given the unpredictability of social media's influence on market movements.
Where it sits in our coverage
While our internal coverage does not provide specific currency targets, the broader market sentiment tilts toward cautious positioning due to the prevailing uncertainty characterized by narrative-driven trading. Recent behaviors suggest that traders might react sharply to further significant posts from similar figures, increasing volatility in currency pairs.
How other firms see it
In this context, firms such as jpmorgan and bofa are monitoring the same narrative landscape but may have differing views on the ensuing impact on asset classes, particularly commodities. While jpmorgan aligns with a bullish outlook, bofa maintains a more skeptical stance, indicating contrasting strategies based on how narratives unfold.
Similar trends in FX might be represented in pairs like EUR/USD and USD/JPY as they adjust to the changing sentiments stemming from political narratives influencing broader financial markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Markets reacting to social media poses new risks for volatility.
- 02Investors are looking for narrative shifts as leading indicators.
- 03Recent oil trades indicate preemptive positioning based on social media announcements.
- 04Caution is advised amidst the uncertainty in economic assessments.
Market implications
Watch for significant fluctuations in volatile pairs like EUR/USD and USD/JPY, particularly during periods of heightened political discourse. This environment suggests that market movements may be misaligned with fundamental analysis as traders react to the latest social media narratives.
Risks to this view
Should there be a sudden restoration of objective economic data or a credible shift in narratives, it could invalidate current speculative positioning. Additionally, a resolution in geopolitical tensions might shift focus away from social media-driven trade significantly.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 24th of March. The challenges for investing remain unchanged.
Markets are not reacting to information, they are generally reacting to social media posts and headlines, even if those posts or headlines are fake news or contradictory. The absence of verifiable facts is already complicating economic assessments. For instance, it is difficult to assess how much Dubai might have to spend repairing war damage when there is little verifiable information about the extent of war damage.
There is now a risk that investors will start looking for leading indicators of social media posts rather than leading indicators of actual information. The Financial Times reports that there were unusually large trades in the oil market immediately ahead of US President Trump's social media post yesterday, which Trump's post then made very profitable. This might cause investors to start paying extra attention to outsized trades in the market as a leading signal of a possible policy shift by the US administration.
The trade pattern yesterday was reportedly not an isolated instance. Investors are also perhaps influenced by loss aversion and confirmation bias. Investors want the war to end, there's an irrational bias in favour of rising markets.
If there is a story that seems to confirm that desire, investors are more likely to react to it. This does not mean that negative stories will be ignored. Iranian denials of Trump's assertions about direct negotiations pushed oil prices back up, and fears of a wider conflict are keeping Brent crude prices over $100 a barrel.
For now, markets do seem to be content to trade strongly on stories, but to provoke an equal negative reaction would probably need more hard evidence of adverse developments. In terms of verifiable data, Japan's February national consumer price inflation came in a little lower than the consensus had been expecting. This was due to more moderate food and energy prices.
On the internationally defined core consumer price inflation measure, the year-on-year rate was unchanged. The Bank of Japan is not likely to respond to these figures, there's nothing here to change established views, and the domestic drivers of inflation are not likely to drive policy decisions in the near term. Attention instead must focus on the relative oil price shock, and also whether there is any change in behaviour by domestic consumers in response to that.
There are assorted preliminary March business sentiment opinion polls out on both sides of the Atlantic today. These numbers are not necessarily that reliable as indicators at the best of times, and these are not the best of times. To the extent that responses have been gathered later in the timeline of the Gulf War, the general level sensationalism is likely to encourage a more pessimistic view being reported.
Sources & References
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