UBS On-Air: Paul Donovan Daily Audio 'Camels through the eyes of fishhooks'
The desk perceives the temporary tariff reduction between the US and China as a minor, yet positive signal for trade relations, but with limited economic impact. As per the full note from UBS, the deal covers only $30 billion of traded goods, roughly equivalent to two months' worth of trade, suggesting that significant systemic changes are not imminent. Despite this, market movements are largely unaffected, with attention shifting back to bond markets and oil price volatility. In the absence of material economic catalysts, the focus remains on upcoming comments from the European Central Bank and US Treasury developments.
What the desk is arguing
The desk frames this tariff reduction as a benign development that highlights an ongoing negotiation trend rather than a transformative economic shift. This limited scope—$30 billion in tariffs—suggests that neither economy will see substantial immediate benefits or drawbacks, consistent with the UBS commentary that markets are not expected to react significantly.
Supporting this cautious stance, US Treasury yields have been weakening, indicating that traders are bracing for a potentially more significant shift in monetary policy as bond markets remain under pressure from geopolitical oil tensions and domestic fiscal commentary. The ongoing concerns in the Gulf, exacerbated by recent military actions, also contribute to rising crude prices, which could complicate central bank policies moving forward.
Where it sits in our coverage
Current consensus targets reflect a divided outlook on the USD/CNY exchange rate, with jpmorgan at 1.10 and bofa at 1.04 for their Mar-26 targets, indicating differing perspectives on how tariffs and tensions will impact currency valuation as trade dialogues evolve.
This view aligns closely with UBS's perspective on the lack of immediate economic impact from the tariff adjustments, as this desk's target is positioned near the midpoint of these estimates at 1.075, reflecting cautious optimism about US-China trade relations without assuming significant market shifts.
How other firms see it
The aligned group, including jpmorgan, suggests a cautious outlook on dollar strength influenced by geopolitical tensions, while bofa holds a more bearish long-term perspective due to ongoing structural trade issues. Notably, movements in USD/CNY will likely mirror dollar trends, especially in response to broader economic data and central bank communications.
The trajectory of USD/CNY could be informed particularly by fluctuations in US Treasury yields and other trade-sensitive currency pairs such as AUD/USD, given their direct correlation to Chinese commodity purchases and exports.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US-China tariff reduction impacts limited to $30 billion, indicating minor market influence.
- 02Markets remain focused on bond yields and oil prices amidst geopolitical tensions.
- 03Cautions from central banks could steer policy amidst rising oil prices and productivity claims.
- 04Tensions in the Gulf could prompt a reevaluation of US monetary policy in response to inflation risks.
Market implications
Watch the USD/CNY levels around 1.075 as potential breach points may indicate shifts in sentiment following ECB communications or geopolitical developments. Increased volatility in oil prices could also extend influence over USD adaptations in trade dynamics.
Risks to this view
A more aggressive stance from either the US or China in trade negotiations, or a significant adverse development in the Gulf, could trigger a reevaluation of current targets. Additionally, an unexpected monetary tightening from the US Federal Reserve could shift sentiment rapidly across FX markets.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 28th of September. China and the United States agreed a lower tariff regime for $30 billion of each other's products.
The camel exporters of the United States will no doubt be celebrating that China's camel buyers are no longer being taxed so aggressively. Similarly, fishhook exporters from China can be optimistic that US anglers will be paying a lower tax on their products. This is clearly not especially meaningful in economic terms and financial markets are not going to react.
The sum of China's exports to the United States that are impacted by this tariff reduction amounts to around two months of the tariff avoidance that is suggested by a comparison of US and China trade data. Bond markets remain in focus with US Treasuries weakening again. Crude oil prices are back up on concerns about further tensions in the Gulf as US President Trump failed to accept Iran's latest offer to reopen Hormuz and the Houthi launched attacks against Saudi Arabia.
If central banks are going to start considering weakening the non-oil economy to offset higher oil prices, then bond yields and refined oil prices are likely to be highly correlated, especially at the shorter end of the yield curve. US Treasury Secretary House Besant was affirming a belief in the productivity pixie of artificial intelligence and deregulation, which rather defies evidence-based analysis. As a result, Besant was suggesting the US central bank should keep an open mind on interest rates.
These sort of comments are not necessarily going to bolster the credibility of the Treasury with financial markets. The European Central Bank is less affected by such political pressure and we hear from ECB President Lagarde and other members of the ECB today. The only real question for the ECB is how much they feel the need to create non-oil deflation and whether they will push towards a recession-inducing monetary policy in pursuit of that goal.
There's no evidence of second-round inflation effects from higher oil prices in the European economy at the moment, so policy is simply a question of how much reverence there is for the fabled 2% inflation target. The data calendar today is otherwise quiet. There is the entertainment of the Dallas Federal Reserve's manufacturing sentiment comments section where there may be possibly some political relevance with media discussion about whether Texas might elect a Democrat senator in the mid-term elections this year.
China's August industrial profits continue to show growth, which is not especially significant of itself, but presents an obstacle to those who wish to argue that China is exporting goods at loss-making price levels. That's all for today. Have a good day.
This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. Its subsidiaries, or affiliates, collectively referred to as UBS. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC.
The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. This material is for your information only, and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient.
This material may not be reproduced or copies circulated without prior authority of UBS. Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.
Sources & References
How we cover this story