UBS On-Air: Paul Donovan Daily Audio 'Markets wanted something different'
The desk is framing the commentary from UBS as indicative of a cautious market, particularly regarding geopolitical tensions in the Gulf and their potential economic repercussions. Per the full note from UBS, Trump's rhetoric may contribute to market nervousness, as his aggressive stance towards Iran may provoke retaliation, impacting inflows and infrastructure in the region. This context highlights the divergent views on inflation, where the President's perception stands in stark contrast to the realities faced by consumers. Investors may react more moderately to such statements, reflecting a broader trend of skepticism towards political messaging, suggesting that any immediate market reaction could be muted amidst longer-term concerns.
What the desk is arguing
The desk posits that President Trump's recent remarks have catalyzed a cautious sentiment in markets due to fears surrounding Iran's potential retaliation. While hints of a US military de-escalation were noted, the emphasis on impending threats suggests that investors are navigating tighter risk parameters. Per the full note from UBS, the interplay between Trump’s words and consumer inflation perceptions underscores a significant disconnect that could affect broader economic sentiment.
Compounded by the rising oil prices — evidenced by gasoline exceeding $4 per gallon — the affordability crisis may dampen domestic consumption, which is crucial for economic recovery. Investors may initially respond negatively, but a lack of seriousness attributed to Trump's posts could limit the volatility observed in the FX markets, particularly in safe-haven currencies.
Where it sits in our coverage
Our consensus target for the relevant pair anticipates a movement toward 1.075, placing it within the range of 1.04 to 1.12. Notable firms supporting this consensus include: - jpmorgan: Target 1.10 for Mar26 - bofa: Target 1.04 for Mar26
This view aligns closely with jpmorgan while diverging from bofa, which holds a more pessimistic outlook at the lower end of the forecast spectrum.
How other firms see it
In general, aligned firms share a cautious optimism regarding geopolitical developments while espousing a more supportive monetary backdrop; however, firms like bofa present contrasting outlooks, highlighting broader market concerns. Related currency pairs to watch include the USD/JPY and the GBP/USD, both of which may react to unfolding events in the Gulf and domestic inflation data.
What the calendar says
At this time, there are no high-impact events scheduled in the next 30 days, allowing traders to focus on market reactions from ongoing geopolitical developments without immediate economic data constraints.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Traders are cautious following Trump's aggressive remarks regarding Iran, reflecting heightened geopolitical risk.
- 02Potential for market duress from oil price increases, with gasoline costs rising above $4 per gallon impacting consumer sentiment.
- 03Discrepancy in inflation perception between Trump and the public may influence economic recovery trajectories.
- 04Market reactions could be tempered by a growing skepticism towards political messaging.
Market implications
Watch for any shifts in the USD/JPY and GBP/USD pairs as geopolitical developments unfold. Given the current tone from the US administration, market players should remain alert to responses from Iranian authorities and potential impacts on global oil markets.
Risks to this view
A sharp de-escalation in rhetoric or significant diplomatic breakthroughs could abruptly shift the market dynamics. Additionally, if inflation data significantly diverges from current projections, especially showing increased consumer costs, it may force a reevaluation of current FX positions.
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 2nd of April. US President Trump's remarks last night were essentially a compilation of recent social media posts in terms of both tone and content.
Unfortunately, markets had looked for emphasis on the likelihood of a US retreat from the Gulf. There were signals about that, but additional stress was laid on the threat to hit Iran quote, extremely hard over the next two to three weeks. The market risk from that statement is that Iran will inevitably retaliate and additional vital infrastructure in the Gulf region is quite likely to be damaged.
That would mean that after the Straits of Hormuz reopen, the recovery time for global markets and the global economy is likely to be more drawn out. However, although there has been a negative market reaction to Trump's remarks, there is likely to be a limit to the extent of that reaction. Investors do not tend to take the President's social media posts terribly seriously nowadays and they are likely to discount the content of last night's comments in a similar manner.
In the course of the remarks, Trump did declare that the US has no inflation. That interpretation differs somewhat from the official statistics and differs even more from the inflation perception of the US consumer, which is why there is an affordability crisis in the United States. While the United States is often characterised as a winner from higher oil prices as a net energy producer, this is not of course universally the case.
The higher oil prices are a significant cost to the vast majority of US households and only a tiny number receive any benefit. If they are shareholders in or possibly workers at oil companies. With gasoline rising further above $4 per US gallon, the population's perception of inflation is likely to move further and further away from Trump's perception.
In addition, the Financial Times reports that the United States is intending to impose tariffs on US consumers of imported medicines of up to 100%. That would not be a universal tariff and some countries and some companies would be exempted. Nonetheless, it implies either higher direct costs for the US consumer or alternatively higher health insurance premiums in the future.
The affordability crisis is more political than economic in its nature as the recent retail sales figures showed, the US consumer has been willing to cut back on savings to pay for the tariffs and for the time being they can do so again to pay for higher oil prices. South Korea's headline consumer price inflation rose slightly in the month of March but not by very much. This is because, of course, the Korean government has chosen to take the oil price hit as a fiscal cost rather than passing it through to the consumer by putting in place an oil price cap.
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