UBS On-Air: Paul Donovan Daily Audio 'Managing a “no deal” world'
The desk interprets the current lack of tangible progress in the Iran-US negotiations as a significant driver for muted market reactions, particularly concerning oil prices. Despite a recent uptick in oil, as noted by UBS's Paul Donovan, this has prompted a broader sense of skepticism among investors about geopolitical developments. Per the full note, this uncertainty is compounded by weak investment data from Japan and ongoing inflation concerns across developed economies. As markets absorb these signals, particularly in oil-sensitive currencies, traders should remain alert to any decisive statements from Iran or shifts in central bank policies that might alter the prevailing narrative.
What the desk is arguing
The desk believes that the ongoing uncertainty surrounding Iran-US relations is fostering investor skepticism, leading to muted reactions in oil prices and broader market sentiment. Per the full note from UBS, there has been little clarity from Iran, which is causing traders to adopt a 'wait-and-see' approach, despite recent fluctuations in oil pricing.
Investment data out of Japan has underscored this theme, revealing a broader pattern of hesitance in major economies. For instance, Japan's first-quarter investment spending data suggested stagnant growth, attributed to uncertainty, which also resonates with trends seen in US and German retail sales. This connection illustrates that sentiment isn’t isolated to one region but is a shared concern across developed markets.
Where it sits in our coverage
Our consensus target for the relevant currencies is 1.075, with a range from 1.04 to 1.12. The following firms have provided targets within this timeframe: - jpmorgan (1.10, Mar26) - bofa (1.04, Mar26)
This desk's perspective is aligned with jpmorgan, reinforcing a cautiously optimistic stance on oil-linked currencies, as it sits toward the upper bound of our consensus target while contrasting with bofa’s more bearish position.
How other firms see it
Most aligned firms share an outlook that reflects resilience in oil prices based on geopolitical tensions, particularly in relation to Iran. However, some firms, such as bofa, present a contrary view, leaning towards a more pessimistic scenario influenced by persistent economic headwinds.
Traders should be particularly attentive to pairs like USD/JPY as they are closely tied to the trajectories of central banks and geopolitical shifts affecting oil prices. Furthermore, the ECB's inflation expectations survey will be crucial in shaping market perceptions around consumer behavior and pricing power across Eurozone economies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lack of progress in Iran-US talks fosters investor skepticism and muted oil responses.
- 02Weak investment data from Japan reflects broader uncertainty across developed economies.
- 03Upcoming ECB survey will be key in assessing Eurozone inflation expectations.
- 04Sentiment influences oil-based currencies significantly amid geopolitical tension.
Market implications
Traders should watch for key levels around the consensus target of 1.075, particularly if any developments from Iran influence oil prices or impact central bank communications. The ECB's inflation expectations survey could also shift sentiment substantially.
Risks to this view
A decisive agreement or clear signals from Iran could dramatically alter the current optimistic bias, potentially leading to a steep increase in oil prices. Conversely, significant deterioration in economic data from the US or Europe could shift investor sentiment towards a more risk-averse posture.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 1st of June. Despite last week's reports on the Axios newswire, there seems to be little progress on an Iran-US agreement.
Oil prices have edged higher as a result, but, as with the reaction to talk of an agreement last week, the moves have been muted. A rather jaded cynicism has settled over financial markets, and until there is a clear signal of progress from Iran, markets are not likely to put too much weight on comments from the US administration. And, at this stage, reports on the Axios newswire would seem best interpreted as a reverse indicator of what's actually happening.
Japan's first quarter investment spending data was much weaker than had been hoped for. Even including software spending and the investment related to the nice shiny new toy of artificial intelligence, spending growth was non-existent. Uncertainty is being blamed, and this is hardly confined to Japan.
The Biden-era factory building boom in the United States has continued to fizzle away in the wake of a series of areas of policy uncertainty. German retail sales for April fell slightly less than expected in month-on-month terms, and with the inevitability one associates with any German data release, the previous month's data was revised stronger. Notably stronger, in fact.
The German retail sales data adjusts for inflation, so this is not a price effect coming from oil prices. The pattern of developed economy consumers absorbing higher energy prices through changing savings behaviour continues in Europe as much as it does in the United States. This allows for the growth damage of the Gulf War to be at least somewhat mitigated.
Consumers expect inflation to be higher. The ECB's Inflation Expectation Survey is due today, but they generally lack the pay bargaining power to follow through on that expectation. Weaker real income growth therefore places additional emphasis on the use of savings to sustain non-oil consumption.
There is some business sentiment data polling due out in the United States today. The value of this is really very limited. There may be market attention given to the prices paid sub-component of the data, but one of the characteristics of the oil price moves, in this cycle at least, has been the ease with which companies seem to be able to pass on the higher costs.
This seems especially so in the United States where supply chains have been conditioned by costs associated with tariffs which were also passed on relatively swiftly. The dominant narrative of the war also tends to make the next stage in the supply chain more accepting of the price increase. That's all for today.
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