UBS On-Air: Paul Donovan Daily Audio 'Fragile or failing?'
The desk views the geopolitical turbulence in the Gulf as an undercurrent that could reshape market sentiment and influence price action in relevant currency pairs. As per the full note from UBS's Paul Donovan, the closure of the Strait of Hormuz following Iranian responses to Israeli strikes suggests rising geopolitical risk, impacting perceptions of supply chain security. Despite some market sell-off in Asia, overall gains from previous trading sessions remain intact, reflecting an optimistic bias amid uncertainty. Additionally, upcoming U.S. economic data, including revised GDP figures and personal consumption metrics, will be crucial in gauging consumer resilience to price pressures exacerbated by oil price spikes, potentially affecting USD sentiment in the short term.
What the desk is arguing
The desk perceives the geopolitical situation in the Gulf as potentially necessitating a risk premium in financial markets. The Iranian closure of the Strait of Hormuz, critical for oil transportation, could disrupt supply chains significantly, thereby creating upward price pressures.
Recent increases in U.S. gasoline prices—currently at all-time highs—will also test consumer spending power. Donovan notes data suggesting that U.S. households have already eroded their personal savings rates to manage tariff-related costs, which indicates an ongoing adaptation to various price shocks.
Where it sits in our coverage
Currently, the consensus target for the relevant EUR/USD pair sits at 1.075, with forecasts ranging from a low of 1.04 to a high of 1.12. Firms contributing to this consensus include: - jpmorgan: 1.10 by Dec-26 - bofa: 1.04 by Dec-26
This desk’s analysis aligns with jpmorgan but diverges from bofa, sitting closer to the higher end of the forecasted range.
How other firms see it
Analysts at jpmorgan and gs tend to align with the desk's perspective, anticipating a moderately bullish outlook amid the geopolitical tensions, while firms like bofa hold a more cautious stance. Enhanced scrutiny on USD pairs, especially regarding oil-sensitive currencies such as the CAD and NOK, will be crucial as tensions evolve.
The evolving situation highlights the potential for USD fluctuations, particularly if inflationary pressures from rising oil prices heighten consumer anxieties.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Geopolitical risks in the Gulf, particularly the closure of the Strait of Hormuz, could necessitate a risk premium in financial markets.
- 02Despite the regional tensions, markets maintain a resilient outlook, with most gains having been retained.
- 03Consumer resilience amid rising prices will be tested, as personal savings rates remain low due to previous economic pressures.
- 04U.S. GDP revisions and personal consumption data are critical in awaiting further market direction.
Market implications
Traders should closely monitor movements in USD, particularly against oil-sensitive currencies like CAD, as well as upcoming personal income and consumption data from the U.S. Revisions to GDP data could catalyze further volatility, especially if consumer sentiment is shown to weaken significantly.
Risks to this view
A rapid de-escalation in the Gulf conflict or significant interventions from geopolitical powers might reverse any upward pressure on risk premiums, altering market sentiment quickly. Additionally, stronger-than-expected economic data from the U.S. could put upward pressure on the dollar, undermining the bearish sentiment anticipated from rising oil prices.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 9th of April.
In economic terms, the Gulf ceasefire is not really holding up. Significant Israeli strikes against Lebanon prompted the Iranian government to close the Strait of Hormuz before it had really opened. Bloomberg data suggests only three ships passed through the Strait yesterday.
This may just be temporary. Certainly the optimistic bias of financial markets has meant that while Asian equity trading has seen weaker markets, yesterday's gains have not been substantially reversed. US President Trump's overnight social media posts demanding a reopening have, so far, not had any obvious effect.
This demonstration of where relative power lies in the Gulf at the moment is relevant when thinking about the longer term and what sort of risk premium might need to be added to supply chains that depend on passage into or out of the Gulf. The US releases revised GDP data for the fourth quarter, which has initially been reported as being quite weak. The data will continue to be revised in the future, of course.
The monthly personal income and personal spending data for February is also due, along with the personal consumer expenditure deflator. This data is all before the dramatic rise in US gasoline prices, which, aside from the post-pandemic spike, are currently at all-time highs. However, the data is still useful in judging the resilience of consumers to a price shock.
US households cut their personal savings rates last year in order to pay for the price effects of tariffs, and this data should continue to show that trend. The US consumer still has the ability to cut savings rates in response to the higher oil price, which impacts spending power in a very similar way to the tariffs, and assuming that they do so, they will be able to maintain consumption in the short term. The minutes of the March US Federal Reserve meeting could perhaps politely be described as even-handed.
There was nothing especially startling. War was expected to raise the consumer price level and lower employment. There was a more general concern about potential weakness in the labour market, and should the costs of war be contained, at least as to inflation, that is likely to become more important in driving policy in the States in the second half of this year.
Whether rate cuts could entirely mitigate labour market weakness is not necessarily that clear. Cost of capital and demand are of course relevant to employment, but so is immigration policy and tariffs, where the Fed has little sway. European data is not especially interesting today.
There's a Bank of England credit condition survey from the UK, which might conceivably be of some interest. German industrial production data was weaker than expected, but the past data was revised stronger. German export and import growth data for February were both stronger than expected, and the January numbers were both revised higher, signalling, as is so often the case in Germany, that economic activity is better than was initially supposed.
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.
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