UBS On-Air: Paul Donovan Daily Audio 'Longer-term concerns'
The recent attacks on Gulf energy infrastructure have introduced a complex dynamic to energy markets, with implications spilling into broader financial conditions. As outlined in the full note from UBS, while investors are currently overlooking short-term spikes in energy prices, the potential for prolonged high prices could pose risks that surpass the adaptive capabilities of economies. In particular, the mention of U.S. political ramifications highlights a growing awareness of the interconnectedness of foreign conflict and domestic economic stability, potentially suggesting an early withdrawal from ongoing geopolitical tensions. Given these factors, the desk maintains a cautious outlook on market stability as energy price disruptions persist.
What the desk is arguing
The desk frames this as a pivotal moment for assessing the potential for sustained economic strain due to energy price volatility. Per the full note from UBS, while market participants have thus far shrugged off short-term energy shocks, the lingering effects could impose significant pressure on both consumer and business sectors in the long term.
Evidence suggests that damage to energy infrastructure raises the likelihood of persistently higher energy costs, which the desk emphasizes could extend beyond the adaptive capacities of global economies. With the potential for prices to be 'higher for longer', this scenario is compounded by rising concerns regarding U.S. withdrawal from international engagements, which may further impact investment flows.
The alternative read would be that markets will not react strongly should geopolitical tensions ease, resulting in stabilization of energy prices. However, this outlook appears less likely given recent events.
Where it sits in our coverage
Our current consensus target for energy-related currencies, particularly the EUR/USD and GBP/USD pairs, is 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view represents a middle ground in the broader consensus, aligning closer to jpmorgan's target at the upper end of the range while diverging notably from bofa's outlook.
How other firms see it
Firms that echo the desk's position include jpmorgan, which similarly anticipates sustained volatility, while bofa presents a contrary stance, wary of potential price corrections in the near term. These perspectives suggest a split in expectations regarding the impact of geopolitical tensions on energy prices.
Watch the EUR/USD trajectory for further evidence of how energy costs may influence broader market sentiment, particularly in relation to ECB monetary policy responses.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Geopolitical tensions are increasing concerns over sustainable energy prices.
- 02High energy costs could threaten economic stability beyond short-term adjustments.
- 03U.S. political reactions may influence global market dynamics.
- 04Market positions will likely remain fragile amid ongoing uncertainty.
Market implications
Traders should monitor the EUR/USD levels closely, particularly as prices approach the upper end of the 1.12 range. Additionally, external factors including energy price developments could trigger shifts in positioning ahead of potential outcomes from geopolitical developments.
Risks to this view
A significant catalyst would be a de-escalation in geopolitical tensions leading to a rapid stabilization of energy prices. Any indications of U.S. policy shifts that lessen foreign commitments could also result in a reassessment of market positions, prompting shifts in currency valuations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 19th of March. The latest escalation in the Gulf War has pushed energy prices higher again.
Attacks on gas fields and oil infrastructure raise longer term concerns. To date, markets have been relatively willing to look through short term oil price moves because consumers and companies can adapt and call on alternative resources as long as there are not actual physical shortages of oil. However, those mitigating factors cannot last forever.
Households won't use savings indefinitely, for instance. Promoting oil infrastructure risks delaying a normalisation of energy markets and that raises questions about economic behaviour in the latter part of this year. However, US President Trump's rather urgent social media posting about infrastructure attacks does suggest perhaps some awareness of the domestic costs of the war, politically if not economically, which would keep investors focused on the idea of a potential US withdrawal.
US retail gasoline prices rose again on Tuesday and an average of $4 a gallon is not now very far away. While the price levels of various fuels in the United States are not at records, the change in certain retail fuel prices is at all time highs. And with prices at the pumps, the change in the price as well as the level of the price has political resonance.
The US Federal Reserve is obviously trying to balance all of this and gave a response yesterday that was more or less in line with expectations. While there was only one dissent from the decision to keep rates unchanged, the tone is still consistent with the possibility of rate cuts over time. There was some focus on tariff effects on inflation.
Of course, there are also other considerations for inflation as well. Trucking costs were rising in the producer price inflation data, which might possibly be tied to declining employment in that sector and related immigration policy. For the oil effect, the Fed is focused on inflation expectations.
These are tricky as they're not easily measured in the fevered partisanship of the United States these days, and they only really matter if they cause a behavioural change on the part of consumers or businesses. Fed Chair Powell offered a fairly clear defence of the Fed's independence, pledging to stay in place for the foreseeable future, including continuing as chair of the FOMC after May. That was more or less what markets had expected to happen, and it means that for the time being, it is Powell's views that matter, and those of former Fed Governor Walsh are a bit of a sideshow.
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