UBS On-Air: Paul Donovan Daily Audio 'Markets still want to believe'
The current market dynamics are being influenced by speculation regarding a potential deal between the U.S. and Iran, as reported by Axios. While optimistic sentiment prevails, underscored by repeated claims of progress in negotiations, there remains a significant uncertainty regarding the actual developments in the Middle East, particularly from Iran's side. Per the full note from UBS, investors are driven by blind faith, impacting pricing behavior despite a lack of concrete data. Notably, the forthcoming U.S. productivity data poses potential implications for corporate health and pricing strategies amid ongoing tensions.
What the desk is arguing
The narrative surrounding U.S.-Iran negotiations is fostering blind optimism in financial markets, which is evident in the stability of trading activity despite recent reports. As articulated by UBS, the markets appear to have an intrinsic desire to see a resolve to tensions, but this optimism may not be justified given the lack of insights into Iran's policy-making processes.
Additionally, the implications of U.S. tariffs on corporate behavior signal that any financial windfalls from recent tariff refunds are unlikely to translate into lower consumer prices, which could further strain market sentiment. Well-documented instances of investor euphoria without substantial outcomes often lead to volatility when realities do not align with expectations. Hence, traders should stay wary.
Where it sits in our coverage
Our consensus target for the USD/EUR pair is 1.075, with a range between 1.04 and 1.12. Notably, firms like JPMorgan anticipate the pairing to settle at 1.10 by March 2026, while Bank of America has set a more conservative target at 1.04 for the same tenor.
The desk's outlook aligns closely with major players in the market, particularly jpmorgan, whose view suggests a bullish scenario projecting adjustments in line with potential easing from geopolitical tensions.
How other firms see it
Aligned firms such as jpmorgan reflect a consensus leaning toward optimism regarding the U.S. economy's resilience, whereas bofa presents a contrasting, bearish stance on the fallout from geopolitical developments. These divergent views highlight a critical split among key market participants.
Traders should be attentive to developments in the USD/EUR landscape, especially given the intertwined influence of U.S. policy reactions and global economic indicators, which remain pivotal to market movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Speculation on U.S.-Iran deal is driving market sentiment despite actual uncertainty.
- 02U.S. firms may not lower prices due to tariff refunds, impacting consumer perceptions.
- 03JPMorgan's bullish target aligns with current market sentiment, contrasting with Bank of America's caution.
- 04Potential for volatility if market optimism does not match geopolitical realities.
Market implications
Traders should monitor the 1.075 resistance level in the context of ongoing geopolitical narratives, particularly updates on U.S.-Iran negotiations. The upcoming U.S. productivity report could also serve as a key driver for market adjustments, affecting corporate profitability expectations.
Risks to this view
A reversal in market sentiment could be triggered by concrete developments in the U.S.-Iran discussions that yield no tangible outcomes, as well as surprising shifts in U.S. economic indicators that hamper growth projections. Any escalated military actions in the region would also potentially destabilize current expectations.
Good morning. This is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's five o'clock in the morning London time on Thursday the 7th of May.
The Axios Newswire reported yesterday that the United States and Iran were, quote, closing in on a deal. Axios made similar predictions on the 15th of April, the 17th of April and the 26th of April. So far there have not been any reports of unusual market trading activity ahead of the new report.
Much like the exiles, markets want to believe, and the inherent optimism bias has kicked in. The challenge remains. The course of the war will be determined largely by Iran now, and financial markets have no real insights into the pressures and policy-making processes of the Iranian government.
Iranian media have suggested that the United States will have to compromise further on parts of their peace proposal. Trade war consequences are still something to be considered. Some US firms are now starting to receive refunds of the illegal tariff payments with added interest.
This money is a positive for the corporates, but it's unlikely to find its way to consumers. Why would firms cut prices to rebate tariffs when new tariffs have already been imposed, which will require prices to be raised again? Having passed the illegal tariffs on to consumers, US firms will regard their repayment as a windfall.
However, rebates to small businesses may help selected consumers, as it effectively improves the personal income of the small business owner. German March factory orders are a relatively minor data release, and these numbers will barely have had time to register the war in the Gulf. There are a few ECB speakers on the calendar, but so far ECB comments have just reflected the known biases of individual policy-makers, and there's not sufficient data on potential second-round effects to change any of those inherent biases at this stage.
US productivity data is due for the first quarter. Productivity is, of course, the sum total of everything economists do not understand, packaged into a single statistic that politicians can then point to. Today's data release is problematic.
It's calculated from first-quarter estimates of GDP, which is, to use a technical term, dodgy data. And it's also based on information from the labour force, which these days in the United States constitutes very dodgy data. The result is dodgy data squared.
US Federal Reserve Chair nominee Walsh wants productivity data to be strong because that suggests efficiency, which might imply lower inflation and lower interest rates. And lower interest rates will please US President Trump. However, higher productivity does not have to reduce inflation.
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