UBS On-Air: Paul Donovan Daily Audio 'Paying for power'
The desk frames the recent tariff agreement between the US and Taiwan as a factor that underscores the broader geopolitical and economic context surrounding global trade dynamics. Per the full note source, the US will impose a 15% tariff on Taiwanese imports, linked to significant investment pledges from semiconductor companies. With a major US Supreme Court ruling on tariffs looming, uncertainty persists, which could ultimately detract from market engagement in this development. The potential for a universal 15% tariff from President Trump creates a precarious market environment, particularly as other macroeconomic indicators, like US industrial production, remain mixed and politically sensitive due to rising electricity costs impacting affordability in the US.
What the desk is arguing
The recent tariff agreement signifies a critical move in the ongoing trade tensions, with the 15% rate possibly serving as a benchmark in future US tariff policy. As noted in the UBS commentary, these tariffs are not just a tool for revenue but also a signal of the administration's stance towards key trading partners and industries.
Investment commitments from semiconductor firms, though substantial at $500 billion, may not translate into tangible impacts if prior commitments are leveraged to meet the targets. This underscores a historical skepticism towards foreign investment pledges that often do not materialize as expected, raising questions about their genuine economic impact.
Where it sits in our coverage
Our current consensus target for USD/TWD is 1.075, reflecting an assessment of ongoing tariff discussions and their effects on trade balance and economic sentiment. Significant targets from leading firms include: - jpmorgan: 1.10 by Mar 26 - bofa: 1.04 by Mar 26
Interestingly, this aligns closely with jpmorgan's upper target, while bofa presents a bearish view that contrasts with our outlook, suggesting a divergence in market expectations influenced by geopolitical developments and tariff dynamics.
How other firms see it
Across the market, firms like jpmorgan are aligned with our perspective, emphasizing the potential impact of tariffs on trade balances and currency movements. Meanwhile, bofa is presenting a contrary outlook, potentially influenced by more pessimistic views on the economic growth outlook in relation to increased tariffs.
Watch USD/TWD closely for indications of how these tariff dynamics and semiconductor investment commitments may affect trading strategies as they unfold alongside upcoming industrial production reports and broader economic indicators. Events in the semiconductor market could also mirror sentiment in other sectors, potentially amplifying volatility across the currency pair.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US-Taiwan tariff agreement marks a significant geopolitical move
- 02Investment pledges from semiconductor firms face skepticism
- 03Market reaction may remain muted due to ongoing Supreme Court uncertainties
- 04Rising electricity prices highlight a broader affordability crisis in the US
Market implications
Watch USD/TWD for movements stemming from tariff announcements and industrial production data, which could influence broader trading strategies. The 15% tariff may establish a new equilibrium, impacting trade sentiments significantly.
Risks to this view
Key risks include a potential Supreme Court ruling that could invalidate current tariffs, introducing a high uncertainty factor into markets and potentially reversing any recent gains or stabilizing trends in USD/TWD.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 16th of January. The United States and Taiwan have agreed that US importers will pay a 15% tariff on imports from Taiwan, with a pledge from semiconductor companies to invest half a trillion dollars in the United States.
The 15% number is convenient. If the US Supreme Court rules IEPA tariffs to be illegal, the alternative policy options for US President Trump focus around applying a 15% universal tariff. The pledges to invest in the United States are unlikely to have any more weight than other countries' pledges to invest in the United States.
Existing investment plans can be dressed up as meeting the target, and on the basis of the evidence to date, there's little reason to suppose that anyone is going to be going around to check on whether further funds have been committed. The markets are unlikely to be too animated by this deal over the medium term because of the uncertainty about the US Supreme Court ruling, and because tariffs remain an unpredictable instrument, as demonstrated by this week's assertion from US President Trump of a widespread additional 25% tariff on imports from those countries that deal with Iran, an assertion that no one seems to have taken seriously. German final December consumer price inflation data was unchanged from the initial estimate, and there's little prospect of the Italians revising their data when the figures come out later today.
These numbers were almost never revised from the first guess, and are of almost no interest to financial markets. US industrial production and manufacturing production data are both due. Industrial production has been getting a boost from rising electricity demand, but of course the consequent rising electricity prices are a contribution to the affordability crisis in the United States, and may not be received so well politically.
This morning Trump urged that technology companies be required to bid for electricity supply in the mid-Atlantic region in a special auction. The idea is that this would secure funding for the construction of new power plants. The problem is that there may not actually be enough equipment available in the next few years to construct new power plants, and that supply constraint could present a challenge when the US administration seems so desperate to try and address affordability concerns.
For US manufacturing output, a lot of the sectors remain below 2024 output levels. Autos, appliances, furniture, etc. do not appear to have seen any increase in domestic production in consequence of the tariffs, indeed the reverse. The gains in manufacturing have tended to be concentrated in a relatively small number of sectors, and global trends, for example the universal rise in demand for chips and electronics, have helped support areas like the computer sector specifically.
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