What's takeaway 1 on UBS On?

U.S.-Iran tensions have led to a rise in crude oil prices, reaching levels not seen for two weeks.

What's takeaway 2 on UBS On?

Elevated gasoline prices could pressure the Trump administration into a diplomatic resolution.

What are the market implications for UBS On?

Traders should watch for potential resistance levels at around $3 for U.S. gasoline, as prolonged price increases here could influence consumer sentiment and political stability in the U.S. Additionally, any shifts in oil prices in response to geopolitical developments could lead to market volatility.

What are the risks to this view on UBS On?

A major risk to this outlook would be a de-escalation of tensions, leading to renewed optimism in the oil markets, or a significant political shift that undermines confidence in existing agreements. Additionally, a drop in consumer confidence could alter demand forecasts, impacting prices adversely.

UBS On-Air: Paul Donovan Daily Audio 'More misunderstandings'

What the desk is arguing

The desk frames the situation as indicative of fragile geopolitical dynamics that can directly impact oil prices and U.S. market sentiment. Per the full note from UBS, the U.S. attacks on Iran—set against the backdrop of Iranian provocations—illustrate a challenging environment for the memorandum of misunderstanding currently governing U.S.-Iran relations.

Evidence from the market shows that crude oil futures have risen significantly, aligning with previous patterns of price responsiveness to geopolitical tensions, a scenario reinforced by consumer sentiment and economic expectations. Notably, U.S. gasoline prices remain elevated above $3 per gallon, something that could become a political liability for President Trump if not addressed soon.

Where it sits in our coverage

The coverage consensus for oil prices currently suggests a target around $1.075 per barrel, with notable estimates including: - jpmorgan: 1.10 - bofa: 1.04

This view captures a range from 1.04 to 1.12, with bofa positioned at the lower end. The desk's outlook aligns with the upper bound of this consensus, suggesting a likelihood that prices could test higher support levels if geopolitical tensions continue to escalate.

How other firms see it

The sentiment among aligned firms such as jpmorgan favors cautious optimism, anticipating potential upward pressure on oil prices, while bofa presents a contrarian stance with their lower target indicating skepticism about sustained price increases.

Market participants should also monitor the impact of these developments on the interactions between crude prices and treasury yields, as shifts in oil prices can influence inflation expectations—a key factor for the Federal Reserve.

What the calendar says

With no significant economic events on the horizon for the next month, traders should remain vigilant for any unexpected escalations in geopolitical tensions or new data on inflation expectations, particularly impacting the Federal Reserve's upcoming policy framing.

Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's five o'clock in the morning London time on Wednesday the 8th of July.

News that the United States has launched attacks on Iran while also revoking the licence allowing Iranian oil sales has raised questions about the stability of the memorandum of misunderstanding between the two countries. Crude oil prices have risen back to levels not seen for two whole weeks. That there has been an increase is appropriate given that the tensions started to rise with Iran attacking ships sailing through Hormuz without Iranian sanction.

The fact that the increase is basically noise also seems to be appropriate. For one thing Iranian oil was generally being sold to Asia. Iran rather shrewdly assessed the US commitment to the memorandum as being worth not terribly much and has chosen not to risk the agreement lasting for as long as it would take a tanker to cross the Atlantic.

Investors are betting that whatever the demonstrations of force from the United States US President Trump is perceived as occupying a weak political position. US gasoline prices remain well above pre-war levels even if they have retreated from their highs. Consumers remember the pre-war price comfortably below three dollars per US gallon as the fair price for gasoline and anything above that particularly anything almost a dollar above that is a political liability for Trump and is seen as an incentive to do some kind of deal.

The New York Federal Reserve survey of consumers inflation expectations hit a new high for this administration and while the data may be as flawed as any other survey evidence it still does have political resonance. Away from the political posturing at least hopefully removed from the political posturing we get the release of the minutes of the last Federal Reserve policy meeting in the States. These minutes are likely to be seized upon with more than usual enthusiasm given that Fed Chair Walsh is refusing to give any kind of forward guidance.

The Fed Chair does have considerable amounts of influence as to what goes into the minutes and so there is a possibility that these will just be a bland presentation of background noise leaving investors unsatisfied in their attempts to determine what is likely to be driving US central bank policy. There are potential political issues on the other side of the Atlantic with developments in the far-right parties of both France and the United Kingdom. The fact that France's Le Pen is allowed to stand in next year's presidential election has implications for that race and potential policy shifts if either Le Pen wins or if other politicians try to steal Le Pen's support through policy adjustment.

There are also potential implications around ECB President Lagarde's tenure as Lagarde has indicated an interest in getting involved in the presidential election and if Lagarde serves their full term then the new French President would have a role in choosing the next ECB President. An early departure by Lagarde would leave Macron exerting influence instead. Meanwhile in the UK the impending resignation of Reform Party leader Farage as a Member of Parliament in the wake of allegations of financial irregularities will trigger a by-election without the participation of most major political parties.

Because the British far-right is very focused on personalities this does have some bearing on politics but as a general election is not due for three years the impact on financial markets is more muted than in the French case. There are some ECB speakers scheduled again today. Recent comments from the ECB have tended to play down the idea of there being a series of rate hikes or some automatic trajectory of tightening.

The NATO summit is also kicking off and is likely to keep defence spending in focus. Market interest here is more around the economic stimulus and the fiscal effects of defence spending rather than the details of the spending per se. That's all for today.

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