UBS On-Air: Paul Donovan Daily Audio 'Shifting expectations'
The desk maintains that the recent US midterm election results are leading to a favorable environment for risk assets despite underlying fiscal concerns, as articulated in Paul Donovan's commentary for UBS. While gridlock may not address the US's unsustainable fiscal position, it mitigates the risk of further fiscal deterioration — a sentiment that resonates positively with investors. Coupled with a notable drop in oil prices, market participants seem to be recalibrating risk assessments. Given the absence of immediate high-impact events in the upcoming calendar, traders should focus on the implications of these midterm results for policy continuity and economic forecasts, especially as they relate to currency pairs.
What the desk is arguing
The desk posits that the perceived stability following the US midterm elections creates a more favorable risk environment, even if fiscal issues remain unresolved. Per the full note from UBS, the expectation of political gridlock is interpreted as a deterrent against further damaging fiscal actions. Therefore, while short-term gains are welcomed, the lack of substantial solutions to fiscal sustainability remains a critical concern.
Supporting this view, Donovan highlighted that oil prices have plummeted, contributing to broader market optimism. The mention of oil prices declining below $100 per barrel aligns with a narrative of reduced geopolitical risk and potential shifts in US foreign policy, which are significant for commodities and their corresponding currencies.
Where it sits in our coverage
Our consensus target for EUR/USD is set at 1.075 with a range between 1.04 and 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This outlook largely aligns with the views from jpmorgan, where the desk's call is at the upper bound of the range, indicating confidence in continued upward momentum amid potential macroeconomic challenges.
How other firms see it
Aligning firms like jpmorgan support a similar bullish narrative on the EUR, while bofa offers a more cautious stance, maintaining a bearish outlook. This divergence suggests a split market sentiment around US fiscal policy and its geopolitical implications.
Monitoring the EUR/USD trajectory is critical, especially in relation to oil price movements and potential adjustments by the Federal Reserve as they respond to these evolving economic landscapes.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Markets react positively to US midterm election results, anticipating fiscal gridlock.
- 02Declining oil prices signal reduced geopolitical risk, impacting investors' sentiment.
- 03The US fiscal condition remains precarious despite temporary relief from gridlock.
- 04Attention should be directed to the impact on currency pairs, particularly EUR/USD.
Market implications
Traders should be prepared to monitor the EUR/USD, especially if it approaches the consensus target of 1.075. The current pricing dynamics suggest a potential rally, contingent on continued stability in oil markets and upcoming macroeconomic data releases.
Risks to this view
A shift in political sentiment leading to unexpected fiscal measures could jeopardize the current bullish outlook. Additionally, a resurgence in oil prices might dampen market enthusiasm, challenging sustainable upward movements in risk assets.
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 5th of November. Financial markets have decided that, on balance, they probably approve of the US midterm elections.
This reflects the idea of fiscal gridlock. Gridlock, of course, does nothing to solve the unsustainable fiscal position of the United States unless one believes in the magic of the productivity pixie, which no sensible investor gives credibility to. However, gridlock stops politicians from making things worse, which is always to be welcomed.
On top of that, oil prices have plunged. This is more than the optimism bias, although the optimism bias is, of course, still there. Rather, it is in expectation of a US retreat from its current position.
US Vice President Vance issued a lengthy statement directly blaming the Republicans' election losses on the war. US President Trump didn't comment much on policy yesterday, choosing instead to focus on the White House ballroom project, but did appear to endorse Vance's statement. With oil prices moving sharply below $100 a barrel, financial markets, at least the non-politically exposed parts of financial markets, had a better day.
German manufacturing continues to manufacture. Orders data showed an as-expected gain in September. Although with what has become a mind-numbing familiarity, the previous data was revised stronger.
It's almost always revised stronger. This tendency to revise data higher is not just something that allows economists to ridicule German economic figures. It's also something that might actually be doing real-world damage.
We live in a world where spin all too often triumphs over substance, and the narrative around Germany tends to be far more pessimistic than the economy actually deserves. Germany's not doing badly, especially considering it has a declining population. But if the narrative is based off of overly pessimistic initial data releases, the pessimism is likely to be all too pervasive.
Euro area producer price data is not often revised, and we'll be getting the September reading of that today. As with yesterday's consumer price reading, this is obviously something that is still dominated by the oil prices and oil price base effects. Consumer price inflation is more affected by this than is consumer price inflation because consumer prices have a far higher labour content, and that dilutes the energy effect more significantly.
Sources & References
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