UBS On-Air: Paul Donovan Daily Audio 'Reality slowly creeps in'
The evolving dynamics of oil markets amid geopolitical tensions are likely to weaken the immediate influence of US President Trump's social media commentary on prices, according to research by Paul Donovan at UBS. As geopolitical concerns persist, especially regarding the closure of the Strait of Hormuz, the energy sector may see pricing move less in response to market sentiment and more according to real supply constraints. Per the full note, while markets currently rely on physical reserves, the shift to supply limitations will make speculative trading around these social media posts increasingly unreliable for price movements. This transition signifies a critical juncture for both energy prices and broader economic implications, requiring traders to adjust their strategies accordingly. Uncertainties loom regarding how quickly central banks may need to react; with key interest rates remaining static, their evolving stance could further dictate market trajectories in the coming weeks.
What the desk is arguing
The desk asserts that as uncertainty about oil availability deepens, U.S. President Trump’s social media outputs will have diminishing impacts on oil prices. With the prospect of physical oil supplies dwindling, postulations based on Trump's comments could become inconsequential due to an overriding emphasis on real supply-demand realities.
Recent analysis indicates that while the U.S. has reserves, reliance on these may falter if the tension stretches. Trump’s prior influence on market dynamics was rooted in expectations; the desk highlights that as immediate physical shortages threaten, these expectations will wane, leading to potentially volatile markets less swayed by speculation.
Where it sits in our coverage
Our consensus target for the USD/EUR pair is 1.075, with a range of 1.04 to 1.12. Notably, jpmorgan projects a target of 1.10 for March 26, while bofa sets its forecast at 1.04 for the same period.
The desk’s view aligns closely with jpmorgan, suggesting a moderate bullish sentiment on the dollar relative to the euro, positioned near the upper bound of this range.
How other firms see it
Overall, firms like jpmorgan and citi echo the sentiment that tighter oil supplies may lead to a stronger USD, while bofa foresees a contrary view, expecting limited dollar strength in the face of ongoing price pressures.
Movements in the USD/EUR pairing will closely track developments in oil supply, with particular attention on outcomes in the meeting of the European Central Bank, which is poised to address inflationary pressures largely stemming from oil prices, underscoring the interplay between these assets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The impact of Trump’s social media posts on oil prices is diminishing as physical constraints increase.
- 02Speculative trading based on social media commentary may falter as real supply issues take precedence.
- 03Central bank responses will be critical in navigating the forthcoming economic landscape as oil prices rise.
- 04Consumer behavior shows resilience as savings are being used to smooth consumption despite rising costs.
Market implications
Watch the USD/EUR pair closely; any physical supply disruptions in oil could directly influence its trajectory, especially with our consensus target of 1.075 being tested. The upcoming discussions from the ECB could yield critical signals about future monetary policy in response to rising oil prices.
Risks to this view
Should the geopolitical situation stabilize rapidly, or should physical supplies resume unexpectedly, this could significantly alter current forecasts, invalidating the desk's positioning that anticipates rising tension. Additionally, stronger-than-expected economic indicators out of the U.S. could prompt the Fed to adjust its monetary policy, undermining this call.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 6.30 in the morning London time on Tuesday the 28th of April. The relationship between the oil market and social media posts from US President Trump is likely to continue to change in the coming weeks.
While the developed economy had reserves to replace the missing oil, Trump's late-night speculations on where the war might be going were able to move financial markets, as they changed expectations about future physical supply. The closer that we get to a point where physical supply is limited, the less shifting expectations will be able to change the near-term oil price. That's bad news for speculators rushing to put on conveniently timed trades around Trump's announcements, and it's bad news for the wider economy.
Consumers should still be able to limit the damage, however, as they are using savings to smooth consumption, rather than cutting back on non-oil consumption. So the price effect will come well before the real economic effect fully takes hold. The Bank of Japan left interest rates on hold, but there was more dissent in favour of a rate increase, with three of the nine votes looking for a tightening.
It is important to recollect the starting point of the different central banks before the war began. In Japan there was a sense, albeit not universal, that policy was accommodative and should be tightened. That encourages the idea of rate hikes even if looking through the temporary effects of the oil price spike.
In Europe the ECB was neutral, suggesting masterful inactivity even with oil price effects. In the UK and the US, policy started this year restrictive, and the need to ease would only be changed if second round inflation effects from the oil price increases became obvious. The UK's British Retail Consortium's Shop Price Index for April, measuring price changes from selected retailers, showed less inflation than had been expected.
There was discounting of food prices and ongoing deflation in non-food retail. The timing of Easter and school holidays can always be a bit of a complication around supermarket pricing schemes, but the good news from this is that on the basis of at least very early data the UK is not currently showing evidence of second round inflation effects. We know consumer spending continues to be quite robust, but consumers seem to be more price sensitive.
This therefore gives real economic growth without evidence of second round inflation, which is probably the best economic outcome one can expect at this stage, though doubtless Bloomberg will strive to find a negative spin somewhere. The ECB's inflation expectations data is due, which is not especially important as consumers are terrible at forecasting inflation. Future economy-wide price increases are assumed to be the same as past perceived price increases for a small number of high frequency purchases.
Sources & References
How we cover this story