UBS On-Air: Paul Donovan Daily Audio 'Markets’ cynicism premium'
The key contention from our desk is that market reactions to geopolitical developments—specifically regarding Iran—are characterized by heightened skepticism, as ascribed in the UBS report. This reflects a broader trend of caution among investors, especially given the historical unreliability of Axios reports regarding impending deals, which have been noted for their tendency to serve as contrary indicators. Per the full note source, the failure of equities to respond positively to President Trump's remarks illustrates this sentiment of caution despite improved macro data from Japan, where GDP grew by 0.6% year-on-year versus expectations. Subsequently, market players should remain alert to this growing cynicism that may restrict significant upward movements in risk assets, especially in the context of fluctuating oil prices.
What the desk is arguing
The thesis is that markets are experiencing a 'cynicism premium' regarding geopolitical narratives, particularly in relation to US-Iran relations. As outlined by UBS's Paul Donovan, while President Trump asserts that talks with Iran are progressing well, markets remain skeptical, viewing the absence of conflict as the default state.
This skepticism is supported by the muted equity market reactions, suggesting that investors are wary of overly optimistic narratives. Additionally, the report notes a 0.6% growth in Japan's GDP, which plays into the context of better-than-expected data despite higher oil prices not yet fully impacting the economic landscape.
Where it sits in our coverage
Currently, our consensus target for EUR/USD is 1.075, with a range from 1.04 to 1.12. Specific forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective broadly aligns with the views from jpmorgan, which is positioned at the higher end of the target spectrum, while bofa's outlook diverges notably at the lower end.
How other firms see it
Firms such as jpmorgan exhibit alignment with the cautious sentiment that markets harbor towards geopolitical events, whereas bofa reflects a more pessimistic outlook on currency movements amidst inconsistent economic data.
Watch the USD/JPY for any spillovers, particularly as these dynamics intertwine with prevailing geopolitical tensions and oil market reactions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Markets reflect a prevailing 'cynicism premium' concerning geopolitical events, particularly regarding US-Iran negotiations.
- 02Equities are failing to rally despite hints of positive developments, suggesting deeper investor skepticism.
- 03Japan's GDP figures, while outperforming expectations, may not offset broader geopolitical concerns affecting market sentiment.
- 04Oil prices have stabilized, indicating a potential hesitation from market players on geopolitical escalations.
Market implications
Investors should monitor critical levels in USD/JPY as it may reflect shifts in sentiment around geopolitical risks. Additionally, keep an eye on any significant commentary or developments around the Iranian talks, as these could catalyze dramatic trading responses.
Risks to this view
A significant reversal in the ongoing Iran negotiations could catalyze a positive reaction from equities and risk assets, undermining the current skepticism. Additionally, any abrupt changes in oil prices due to geopolitical tensions could alter market dynamics markedly.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 19th of May. US President Trump has declared that the United States has delayed an attack on Iran because the negotiations with Iran are going so well.
There has been no independent confirmation of these statements. Corporate reactions have been cautious and consistently inconsistent. Equities have not reacted positively.
No attack is the status quo. And if investors have learned one thing about Axios news wires, reporting of negotiations and imminent deals, it is that Axios has a consistent track record as a reverse indicator. Crude oil prices have paused their rise, however, perhaps taking the comments as evidence of a US reluctance to escalate the current situation.
Japan's first quarter GDP data was a little stronger than expected. The habit of annualising does tend to exaggerate the difference from consensus and the 2.1% growth rate fell within the range of economic forecasts. The previous quarter's growth was revised lower, so in more conventional year-on-year terms the data is much less dramatic, with a 0.6% growth rate.
Better exports helped, led by what appears to be artificial intelligence-related exports heading to Asia. And domestic consumption was also better than anticipated. It's worth noting that almost none of the oil shock will have hit this data, because Japan's initial response was to shield oil consumers through price controls, taking the burden of the price increase onto fiscal policy.
That approach faded as the war has gone on. Growth is therefore likely to slow in the coming quarters. UK labour market data for March and April was fairly inconclusive.
Overall employment was down, but with the trends in self-employment that exist in the UK, overall employment was assumed to have risen in recent months. The unemployment rate increased a little, but so did bonus payments to employees, although that's an average number and the composition of the workforce might have something to do with that. There's nothing in the report to signal that consumers are likely to be weakening anytime But at the same time, there's nothing really in the labour market data to prevent the Bank of England from cutting rates once the fog of war has lifted.
Russian President Putin is to start a visit to China today. This is not necessarily a major market-moving event. There's no reason to expect any more economic substance to this visit than resulted from US President Trump's recent visit.
But with Russia in retreat in Ukraine and China's President Xi reportedly suggesting that Russia would regret its invasion, the geopolitical angle is perhaps more important. There's also the question of energy supplies to China. That's all for today.
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