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 27th of July. The pattern of the Gulf War is starting to play out something like that of the trade war.
The US 2025 tariff policy went back and forth. US President Trump would make a declaration, there would be a strong market reaction, and then there would be a policy retreat in the face of that market reaction. The problem with this strategy is that over time investors began to anticipate the retreat, meaning that there was a more muted market reaction and thus the pressure to bring about the retreat lessened.
With the Gulf War, the escalation of the conflict pushed the oil price back above $100 per barrel and that gave fresh life to fears of US interest rate increases. The US then retreated from its aggressive stance. There are two differences between the tariff catch-22 and the Gulf War catch-22.
US tariffs were always primarily a unilateral event, the rest of the world didn't need to respond. The war requires Iran to respond in a similar vein. It was only really with the Iranian decision to halt strikes in the wake of the US policy change that the oil price began to fall.
Second, the damage of the tariff policy was largely confined to the US economy. The rest of the world has carried on trading quite nicely and global trade is at record highs relative to GDP. The main global transmission mechanism was via expectations for US interest rate increases in the wake of rising US inflation.
The changeable US policy on the Gulf has direct consequences for the global economy via the price mechanism in the oil market and potentially through physical constraints of shortages of oil supply. China released June data for industrial profits. This is not necessarily a show-stopping data release but it has become more important politically.
The rise of economic nationalism in the global economy has encouraged politicians to accuse China of dumping goods into global markets. The point about trade dumping is that the exporter is selling at a loss in order to gain market share, to get rid of overcapacity or indeed to drive competitors into bankruptcy. The flaw in that narrative is that China's industrial profits continue to grow.
There is quite a range of profit experiences and some sectors may still be open to accusations of dumping. The problem is that domestic demand in China is weak and that must be assumed to impact profitability in those areas that have reasonably high levels of domestic demand exposure. But to make a general accusation of trade dumping by China is just not backed by the economic data.
There are some sentiment data releases cluttering up the calendar today. The US Dallas Fed manufacturing survey with its ever-entertaining comments section is due as is the July German EFO poll of corporate expectations. The United States is also offering durable goods data which is of some interest in giving insight into the nature of investment spending in the US at the moment.
That's all for today. Have a good day. UBS AG, regulated by FINMA in Switzerland.
Its subsidiaries or affiliates, collectively referred to as UBS. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA-SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.
This material is for your information only and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS.
Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.