UBS On-Air: Paul Donovan Daily Audio 'Equity volatility, economists’ indifference'
The desk interprets recent volatility in technology equities as primarily superficial and disconnected from fundamental economic change. Per the full note from UBS, this disconnect suggests that economists are currently indifferent to market movements which do not reflect an immediate risk to consumer spending habits, reinforced by the concentration of equity ownership among higher-income groups. This view is supportive of a stable consumption outlook despite observed declines in equity values, which are seen as too small to provoke significant wealth effects. No upcoming calendar events are expected to challenge this narrative, providing a stable backdrop for currency markets.
What the desk is arguing
The desk contends that the volatility in technology stocks, particularly the notable decrease in the South Korean market, is not indicative of broader economic concerns. Per the full note from UBS, economists remain indifferent as these stock movements do not suggest a material shift in economic fundamentals or the consumer spending trajectory.
Despite fears concerning potential wealth effects from equity losses, UBS argues that current consumption patterns are well-established and not easily swayed by fluctuating tech equities. This argument is particularly relevant as equity ownership in the U.S. is concentrated among higher-income groups, limiting the impact on overall consumer behavior.
Where it sits in our coverage
Considering our internal targets for USD/EUR, the consensus there stands at 1.075 with a range of 1.04 to 1.12, as indicated in our coverage.
jpmorgan forecasts a target of 1.10 for March 2026, while bofa positions lower at 1.04 for the same tenor. Our conclusion aligns with the upper side of this spread, reinforcing the notion that economic fundamentals continue to support the current trend despite the recent market jitters.
How other firms see it
Several aligned firms share the view of stability in consumer spending against equity market fluctuations, with jpmorgan and goldmansachs highlighting a similar perspective on consumer resilience. Meanwhile, bofa offers a contrary stance that suggests vulnerability in consumer behavior depending on equity market performance.
In the context of this discussion, monitoring USD/JPY may provide further insights, as it reflects investor sentiment and risk appetite that might be influenced by the broader tech sector movements.
What the calendar says
There are currently no high-impact events scheduled that could disrupt this stable outlook within the next 30 days, allowing the desk to maintain a focus on implied market trends and consumer patterns without immediate external pressures.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Technology equity volatility appears disconnected from economic fundamentals.
- 02Consumer spending is expected to remain stable despite recent market declines.
- 03Current economic conditions do not suggest immediate wealth effects from equity losses.
- 04No significant upcoming economic events may alter this outlook.
Market implications
Traders should watch the USD/EUR at the 1.075 level as a pivot point. Given the broader economic backdrop and lack of immediate catalyst, movements around this level could signal further directional bias in the currency pair.
Risks to this view
A reversal of this thesis could occur if we see unexpected shifts in consumer spending due to external shocks, such as significant geopolitical events or macroeconomic data release indicating a downturn. Sudden changes in market confidence or central bank policy could also prompt a reevaluation of this stable outlook.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Tuesday the 23rd of June. Technology stocks have been weakening in recent trading with notable declines in the Korean market overnight.
This has nothing to do with any change in economic fundamentals and so is not generally worthy of economists' attention. Whenever there are moves like this in financial markets there is often a concern expressed about wealth effects, the idea that a loss of hypothetical equity wealth will cause consumers to cut back on spending in order to save more money. This move is too soon and too small to have a noticeable effect like that.
Equity wealth is not something that actually affects many consumers in society, especially in the United States where equity ownership is very concentrated into higher income groups. Consumers' commitment to spend is anyway quite strong at the moment. Wealth effects are likely to be overwhelmed by the desire to at least maintain current consumption patterns.
The current situation in the Strait of Hormuz seems to be about as clear as the Lincoln Reflecting Pool. The Financial Times is reporting that there is confusion amongst ship owners about whether to follow Iranian instructions or US instructions in terms of where to sail. The result is only a moderate increase in the number of ships passing through the Strait.
There was some expectation of a slow process for reopening so this should not be too concerning for financial markets. And the passage of an increased number of vessels postpones the risk of physical energy shortages emerging. But it does perhaps put a little bit more focus on the pace of the current peace negotiations.
It has been confirmed that the United Kingdom is to have its seventh Prime Minister in ten years. This is hardly without precedent. Exactly the same thing happened in the first ten years of King George III's reign and the seventh, Lord North, went on to govern for twelve years.
Of course, North also contributed to the loss of the North American colonies 250 years ago but these things happen. The market reaction of general indifference seems to be an appropriate response given the fact that this current change is more one of spin than of substance. The data calendar has nothing other than business sentiment polls to recommend it.
These surveys have always had a loose relationship to reality and the gulf between sentiment and reality at the moment is at historically high levels. The media cycle and political partisanship work against that gap-narrowing any time soon. There are also a few central bank speakers.
ECB President Lagarde, in remarks yesterday, did not go so far as admitting that the ECB has committed a policy error with its last rate rise. Lagarde did suggest that further action was unlikely and that has raised hopes that the ECB may not compound its mistakes with more rate increases. 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. It's subsidiaries, or affiliates, collectively referred to as UBS.
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