UBS On-Air: Paul Donovan Daily Audio 'Spinning away from war?'
Per the full note , markets are showing a slight uptick in optimism, particularly regarding the prospects for diplomatic resolutions in the Gulf region. The recent actions of US President Trump, including reaffirming agreements with Denmark and Greenland, may signal a new approach to negotiations with Iran, paralleling discussions around a potential revival of the Obama-era nuclear deal. With the crude oil price slightly declining amid these diplomatic overtures, traders should closely monitor developments as sentiment shifts from outright pessimism. As this sentiment evolves, the lack of impactful economic data in the immediate calendar suggests that traders may focus more intently on geopolitical developments than domestic indicators in the short term.
What the desk is arguing
The desk suggests that recent shifts in diplomatic tone between the U.S. and Iran could enhance market optimism regarding crude oil prices. Paul Donovan from UBS highlighted that while the rhetoric remains aggressive, historical patterns suggest potential pathways for negotiation, even if those talks remain indirect for now.
Recent developments in crude oil markets reflect this sentiment; for instance, a minor decline in crude prices could be interpreted as a cautious market response. This contrasts with the elevated diesel prices in the U.S., which have driven some speculation about potential export bans, yet these would have limited immediate domestic impact, given global supply chains.
Where it sits in our coverage
Our consensus target for USD/BRL is set at 1.075, with a range between 1.04 and 1.12. Current targets are: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's outlook appears somewhat at odds with bofa's more pessimistic stance, as it sits near the upper boundary of our internal predictions.
How other firms see it
Firms like jpmorgan align with a more optimistic view of the Gulf's geopolitical landscape, while bofa holds a contrary position suggesting caution in the short term.
Traders should also keep an eye on crude oil prices as they are likely to be influenced by these evolving dynamics, especially in relation to the USD's strength against emerging market currencies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market sentiment poised for cautious optimism around U.S.-Iran relations.
- 02Recent diplomatic gestures may be a precursor to shifted oil supply dynamics.
- 03Key crude oil prices show minor declines, highlighting cautious trader sentiment.
- 04Potential domestic policies on diesel exports indicate ongoing market tensions.
Market implications
Traders should monitor USD/BRL around the 1.075 mark as geopolitical developments unfold. Look for a reaction in crude oil prices, particularly any significant moves that may challenge the recent pullback in sentiment.
Risks to this view
The likelihood of failed talks or resurgent hostilities could sharply reverse any market optimism. Additionally, an unexpected spike in diesel or crude prices could curtail this fragile sentiment, particularly in relation to domestic energy policies imposed by the U.S. government.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 23rd of September.
Without returning to the full-blown optimism bias of earlier this year, markets have become somewhat more positive about the prospects for diplomatic resolutions in the Gulf. US President Trump signed an agreement with Denmark and Greenland that essentially reaffirms the status quo, but which Trump was able to spin as something new. The idea of a revived Obama nuclear deal with Iran, just spun differently, has always been on investors' radars for the Gulf.
Trump's speech to the United Nations was very aggressive, but both the Iranian and the current US regimes have a history of hyperbole. That may help both sides look past the rhetoric, as each can easily recognise it for what it is. Finally, there were pseudo-talks between Iranian and US delegates yesterday.
These were not actually direct talks, so much as Qatar shuttling backwards and forwards between two different rooms carrying messages. This is still playground diplomacy. The messages might as well have been, my friend fancies you, but playground diplomacy is a step forward from what we have had.
The result is that the crude oil price is down a bit, but without getting carried away. Diesel prices in the United States hit another all-time high on Tuesday. Trump suggested a willingness to contemplate a diesel export ban from the United States, but it's not clear that this would necessarily impact domestic diesel prices that much, given that the war has a global price impact.
A ban would require congressional approval, and House Speaker Johnson has not been keen for members of Congress to get together and vote on things in case unwelcome issues resurface. The data calendar is cluttered with business sentiment polls, which, if they are filled in at all, are completed by the same people who fill in consumer sentiment surveys with such partisan bias and disregard for economic reality. They provide content for financial media and act as a modest distraction from the political circus.
We do get some central bank speakers, including Barr from the United States. The Federal Reserve's Barkin was suggesting that one rate hike may not be enough. This is what is technically known as a statement of the obvious.
The rate hike that we have had will have zero consequences for either growth or inflation, although it does increase the strain on the indebted and challenges their resilience to future shocks. Another rate hike would just likely be as economically impotent. If the Fed wants things to happen, it must hike so far as to cause a recession in the non-oil economy.
Whether that's enough for some Fed members is not clear. That's all for today. Have a good day.
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