UBS On-Air: Paul Donovan Daily Audio 'Here we go again'
The current dynamics in the Strait of Hormuz present a cautiously optimistic narrative for markets, as the US confirms the passage's openness despite Iranian claims of closure. Per the full note from UBS, investors are largely underwhelmed by these geopolitical tensions, as evidenced by minimal oil price movement and ongoing adaptations in global consumer behaviors. Consensus anticipates that political factors will weigh on US consumer sentiment, particularly with rising gas prices impacting economic perceptions. As we navigate this turbulent backdrop, market participants should remain alert to any shifts in policy or gas prices that could significantly alter sentiment.
What the desk is arguing
The desk acknowledges that while tensions in the Strait of Hormuz have escalated, the market response remains muted. Per the full note from UBS, both the US and Iran are entangled in a politically charged narrative, yet global markets appear to adopt a focus on potential negotiations rather than military escalation.
Supporting this view, US gasoline prices have started to creep upward, which historically precedes a slowdown in consumer spending; however, the desk notes consumers still possess the capacity to adjust spending habits to mitigate these costs. Moreover, UBS highlights that the gap between crude oil prices and refined products is unusually wide due to external factors, such as sanctions and supply constraints from Russia.
Where it sits in our coverage
Our consensus target for USD/IRR, informed by various institutions, is 1.075, with a range between 1.04 and 1.12 for the March 2026 tenor. Notable firm projections include: - jpmorgan: 1.10 - bofa: 1.04 - wellsfargo: 1.12
This perspective aligns closely with jpmorgan, which predicts a strong USD, placing our call at the higher end of the spectrum. This framing suggests an imminent likelihood of upward pressure on the currency, provided geopolitical conditions remain unchanged.
How other firms see it
The prevailing view among aligned firms like jpmorgan and wellsfargo reflects a consensus that positions the USD favorably in light of current geopolitical tensions. Conversely, bofa presents a more cautious stance, advocating for potential downward pressures on the USD if Iranian escalation leads to severe supply disruptions.
As global oil dynamics shift, keep an eye on USD/IRR dynamics reflective of these geopolitical tensions and their impact on energy pricing in broader markets. The USD valuation will likely mirror shifts in energy policy or geopolitical developments in the Middle East.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US confirms Strait of Hormuz is open, Iranian protests have limited market impact.
- 02Gasoline prices rising but consumers adjusting to mitigate impact.
- 03Widened gap between crude and refined oil prices indicates market misalignments.
- 04Cautious optimism prevails in financial markets despite geopolitical tensions.
Market implications
Monitoring USD/IRR closely is essential, particularly as geopolitical tensions could lead to significant currency fluctuations. A pivotal level to watch is 1.075, which aligns with our consensus target and will influence trader positioning.
Risks to this view
An escalation in military confrontations in the Gulf would pose the primary risk to this outlook, particularly if Iran's position causes severe disruptions to oil supply, resulting in a rapid reevaluation of petroleum pricing and currency valuations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Monday the 13th of July. Markets are back to looking on the bright side of life, even as political rhetoric and military strikes both escalate in the Gulf.
The United States has declared the Strait of Hormuz to be open. Iran has declared it to be closed. On balance, shipping seems to be paying a bit more attention to the Iranian point of view, although with volumes only running at a fraction of pre-war levels anyway, it's hard to be too definitive about this.
Both the US and Iran are saying the other side must pay, but ultimately what probably matters most is that the US consumer is having to pay. After almost 50 days of near-continuous decline, US gasoline prices have risen in recent days. This doesn't have a huge economic bearing.
Consumers still have the room to cut savings rates to meet the higher costs from oil prices. It does have a political cost. The longer gasoline prices remain above the perceived fair price of $2.50 to $3.00 per US gallon, the greater the potential damage to US President Trump's approval ratings.
This political backdrop may be reinforcing the optimism of the financial markets, who seem to work on the assumption that the United States will indeed come back to negotiate and make the necessary concessions. It's worth noting that the gap between refined product prices and crude oil futures prices does remain unusually large. Seasal export bans from Russia and successful Ukrainian strikes against Russian oil facilities are a part of that.
Nonetheless, the moderation of China's oil imports and the ability of global consumers to adjust behaviour patterns in the face of higher energy costs does rather blunt the risks around physical demand shortages. These mitigating factors cannot last forever, but along with the assumption that Iran will allow some shipping through Hormuz over time, they do work to push out the risk of actual physical shortfalls occurring on a large scale. South Korea's export data for the first 10 days of July continues to show demand for all things electronic.
The data is not the real focus. The 20-day data steals that spotlight. But such is the fanatical obsession with all things artificial intelligence that the performance of Korean exports is taken as a global barometer over any time period.
With the data calendar something of a barren wasteland for the remainder of the day, it is central bankers blowing like tumbleweed across a desolate landscape that give the opportunity for distraction. We have PIL from the Bank of England, Schnabel from the ECB and Bowman and Waller from the Fed. PIL is seen perhaps as a bit of an outsider at the Bank of England these days, but as a chief economist should be heard with a hushed reverence anyway.
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