UBS On-Air: Paul Donovan Daily Audio 'Living in uncertain times'
The desk argues that current market volatility stems from conflicting messages coming from U.S. officials regarding their objectives in the Gulf War. This uncertainty complicates investors' ability to price risk accurately, as highlighted by UBS economist Paul Donovan, who notes that without clear objectives, progress—and thus the potential duration of the conflict—remains ambiguous. Market reactions have been observed as risk markets weakened following tensions between the U.S. and Iran, particularly surrounding the Strait of Hormuz. In light of this situation, traders should remain vigilant as the evolving geopolitical narrative continues to shape market conditions, especially in the wake of the weekend's incidents.
What the desk is arguing
The uncertainty surrounding U.S. military objectives in the Gulf War poses a significant challenge for investors. Per the full note from UBS, differing and at times contradictory statements from U.S. officials, including President Trump, have exacerbated market volatility, complicating risk assessments ahead of crucial deadlines. Investor sentiment has thus been tethered to these geopolitical developments, as evidenced by the recent weakening of risk markets.
As Paul Donovan points out, the looming potential for escalated hostilities—highlighted by threats against Iranian and U.S. assets—amplifies this volatility. The situation at the Strait of Hormuz, a vital passage for oil shipping, could serve as a catalyst for more pronounced disruptions in the global economy if tensions escalate further.
Where it sits in our coverage
Our consensus target for USD/EUR is 1.075, with a range extending from 1.04 to 1.12, anchored by forecasts from key players in the space: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns more closely with jpmorgan's stance, sitting slightly above our median target but is more bullish compared to bofa's lower forecast. The divergence in sentiments from these firms highlights the ongoing ambiguity in geopolitical developments and macroeconomic factors influencing the currency market.
How other firms see it
Similar perspectives on geopolitical risk are seen among firms like citi and goldman, who also favor a cautious approach in their currency forecasts. Conversely, deutsche and bofa present a more bearish outlook, indicating possible downside risks from renewed geopolitical tensions.
Traders should keep an eye on the USD/EUR dynamics closely, as movements in this pair tend to reflect broader sentiments regarding U.S. foreign policy and central bank responses. Additionally, watch for developments related to oil prices, which are likely to be influenced by tensions in the Gulf region, particularly involving the Strait of Hormuz.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S. military objectives in the Gulf remain unclear, complicating risk assessments.
- 02Market volatility has heightened due to escalating threats between the U.S. and Iran.
- 03Investor sentiment is significantly shaped by geopolitical narratives.
- 04The situation at the Strait of Hormuz could amplify energy market fluctuations.
Market implications
Watch closely for any significant news regarding U.S.-Iran relations, particularly involving the Strait of Hormuz, as this could drive volatility in risk markets. Levels around 1.075 for USD/EUR will be critical to monitor for potential further positioning changes.
Risks to this view
A reversal in the market narrative could occur if a significant diplomatic breakthrough arises, leading to de-escalation of tensions between the U.S. and Iran. Additionally, stronger-than-expected economic data from either region could shift the focus away from geopolitical risks, prompting recalibration in the risk premium.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Monday the 23rd of March. The problem that investors have with the Gulf War comes in two related areas.
It is not certain what US objectives are, which means that measuring progress towards those objectives, and thus the likely length of the war, is almost impossible. Statements from US President Trump and others have given different and at times contradictory assessments of the situation. And in the absence of measurable objectives, those statements have undue influence over any assessment of the length of the war.
The result is volatility in financial markets and uncertainty in the real economy. The weekend's exchanges between the United States and Iran have caused risk markets to weaken. Trump set a deadline for Iran to reopen the Strait of Hormuz.
The deadline passes this evening US time. There is almost zero prospect of Iran responding to this, although the Iranian parliament is formalising arrangements whereby ships pay a fee in order to pass through the strait. Trump threatened to attack Iranian power plants, in response to which Iran threatened to attack desalination plants in the region and financial institutions associated with the United States.
The financial institutions threat is very vague. The desalination plant threat is potentially very serious indeed, with most of the region relying on desalination for a considerable amount of its drinking water. The market reaction may provoke a change of tone from Trump today, but absent that, risk markets are likely to remain volatile.
Over the weekend, there were mayoral elections in France, with a presidential election looming next year. These have attracted some attention. The far-right Arrhen failed to win many big cities, but it did win some smaller cities, especially in the south.
The results are unlikely to affect markets specifically. The wider issue of the war will dominate for now. However, the results will be important in shaping longer-term expectations about the ability of the far-right to either disrupt or to take control of political power in France and indeed in other major European economies.
There has been a lot of attention around the disruption to fertiliser supply arising from the Gulf War and what that implies for food prices. Farmgate food prices are important to emerging market consumers. Farmgate food prices, and thus fertiliser costs, have relatively little to do with developed economy food prices.
Sources & References
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