UBS On-Air: Paul Donovan Daily Audio 'Here we go again'
The landscape of US politics is poised to influence financial markets as the House of Representatives attempts to elect a Speaker today, which carries implications for both legislative viability and economic policy ahead of the new administration. Per the full note from UBS, the incumbent Speaker, Mike Johnson, faces challenges given the narrow Republican majority, making this vote significant for future governance and potential economic reforms. The political climate is further complicated by increased economic nationalism, as evidenced by President Biden's reported move to block foreign acquisitions, signaling a potential shift in capital flow regulations. As these themes develop, they could sway market sentiment towards riskier assets and prompt volatility in the FX space, particularly if political gridlock persists.
What the desk is arguing
The desk argues that US political developments will significantly impact market dynamics with the ongoing vote for Speaker of the House. The small Republican majority implies a potentially contentious legislative environment that can complicate economic policy initiatives. Per the full note from UBS, Johnson's support from Trump and Musk adds a layer of market speculation regarding the alignment of future policies.
The narrow margin of 219 to 215, with dissenting Republican votes possibly disrupting Johnson's chances, highlights the fragility of this political moment. A successful election could signal a more cohesive approach from the incoming administration, while failure could lead to protracted negotiations and further market uncertainty.
Where it sits in our coverage
The consensus target for the USD is currently set at 1.075, with a range expected between 1.04 and 1.12. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with the jpmorgan forecast, placing our perspective at the upper bound of the consensus, reflecting an expectation of strengthened USD resilience as political clarity is sought.
How other firms see it
Firms aligned with a stronger USD include jpmorgan and citi, urging traders to anticipate dollar strength in light of political stability. Conversely, bofa holds a contrary view, suggesting a weaker dollar trajectory based on potential delays in economic recovery due to ongoing political disputes.
Keep an eye on the volatility of USD/EUR as shifts in US governance could create ripple effects across major currency pairs, particularly if future economic policies are delayed or modified significantly.
What the calendar says
With no immediate high-impact events scheduled in the next 30 days, market participants should remain focused on political developments, notably the outcome of today's vote in the House, as it may influence market sentiment and positioning ahead.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The election of House Speaker is crucial for determining legislative efficacy under a narrow Republican majority.
- 02Dissent among Republicans could prolong political gridlock, impacting economic decision-making.
- 03Increased economic nationalism, illustrated by Biden's trade decisions, may affect capital flows and market sentiment.
- 04Watch for potential volatility in FX pairs related to changes in US political dynamics.
Market implications
Traders should closely monitor the outcome of today's Speaker vote as it may influence market volatility and sentiment towards risk assets. A successful vote could strengthen the USD, particularly against the EUR, while failure to confirm Johnson may lead to uncertainty and risk-off behavior.
Risks to this view
Key risks include failure to elect a Speaker, which would lead to further political stalemate and increased volatility in financial markets. Additionally, aggressive economic nationalism measures, such as capital controls, could negatively impact investor sentiment, leading to a depreciation of the USD if perceived as adverse to economic recovery.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management at 7 o'clock in the morning London time on Friday the 3rd of January. US politics gets some attention today as the House of Representatives tries to elect a Speaker. Current US Speaker Johnson is not certain of winning the position because the Republican majority in the House is relatively small, 219 to 215 members, and one Republican has publicly pledged to vote against Johnson.
However, US President-elect Trump's influential adviser Musk has endorsed Johnson, as has Trump. The vote today does matter because if it fails, time will have to be spent getting to a solution. A successful vote also matters because the degree of politicking that goes on around it will be a signal as to how easily the incoming administration will be able to pass legislation.
There are areas of uncertainty about what a US President can do with things like universal trade taxes in the absence of additional legislation. Politics is also in evidence with the Washington Post reporting that US President Biden is to block Nippon Steel's proposed acquisition of US Steel. Economic nationalism is often talked of in terms of trade tariffs, and of course that is an obvious form of prejudice politics.
But capital controls on capital flows in and out of a country can be just as powerful a form of economic nationalism. It can all be summed up as how dare foreigners try and buy our treasured assets, and how dare our companies invest overseas rather than at home. Neither approach is especially helpful for efficient economic growth.
The UK has a series of consumer credit figures coming out, and some economic data is always going to be a welcome alternative to the political noise. Moreover, this is economic data that, more or less, one can trust, because the financial sector is regulated and has an obligation to provide these figures. The data is for November, and it will be interesting to see if concerns about the government's budget tempered demand for credit, or whether the combination of job security and rising real incomes encouraged people to go and spend.
From the US, there is a business sentiment opinion poll, which is probably not worth bothering with, given the political polarisation. The general rule with sentiment polls in the States is that they are likely to surprise positively, because Republicans tend to be more emotional than Democrats in their response. So Democrats moving from positive to negative sentiment because of the election will be outweighed by the scale of Republicans moving from more negative to more positive.
That's all for today, have a good day. Dash disclaimer.
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