UBS On-Air: Paul Donovan Daily Audio 'Stimulus and redistribution'
The desk views the potential settlement between Iran and Oman regarding the Strait of Hormuz as a key development influencing broader oil price sentiment and, therefore, FX market dynamics. Per the full note source, the ongoing optimism about this geopolitical situation could shift regional logistics and insurance costs, despite the fact that immediate operational changes in shipping through the Strait remain uncertain. Additionally, the effective redistribution of fiscal benefits from recent U.S. tariffs indicates an underlying economic tension that may impact consumer behavior and pricing strategies in the marketplace, which could also factor into FX fluctuations.
What the desk is arguing
The desk positions that the tentative agreement between Iran and Oman could symbolize a significant shift in geopolitical stability in a region critical to global oil supply chains. This optimism, while currently elevating oil prices, brings additional risk tied to the reality of U.S. sanctions on Iran, which remain in place as negotiations have yet to culminate in cooperation with the U.S. government.
Support for this view rests on indications that any potential tariffs or charges imposed could lead to higher freight costs, which in turn would affect supply chain logistics and the cost of goods. Notably, the U.S. fiscal situation is significant, as up to $165 billion in tariffs have been borne by U.S. importers and subsequently passed to consumers through elevated prices, with implications for inflation and consumer spending.
Where it sits in our coverage
Our coverage suggests a consensus target for the USD/EUR pair at 1.075, with a range from 1.04 to 1.12. Key targets include:
This view is positioned towards the upper end of the defined consensus range, reflecting rising inflationary pressures and a bullish bias on the USD as fiscal dynamics evolve.
How other firms see it
The consensus is fairly aligned among firms focused on the inflationary implications of U.S. tariffs, with both jpmorgan and citi indicating a bullish outlook. Conversely, firms like bofa highlight a more cautious view, suggesting potential for pullback based on differing inflation perceptions.
Key related dynamics include monitoring the USD/EUR relationship as it correlates with U.S. Federal Reserve policies and market responses to ongoing geopolitical tensions, especially regarding oil supply chains in light of these negotiations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Potential Iran-Oman settlement may stabilize oil prices and affect regional logistics.
- 02U.S. tariff redistribution shows ongoing inflationary pressures impacting consumer pricing.
- 03Current FX positions will need to factor in geopolitical developments alongside fiscal dynamics.
Market implications
Traders should monitor the USD/EUR level around 1.075 as a potential pivot point. Furthermore, developments in negotiations about the Strait of Hormuz will be crucial in shaping market sentiment, especially as reactions to any confirmed agreements unfold.
Risks to this view
The primary risk to the desk's outlook would be a breakdown in negotiations or a significant punitive action from the U.S. towards Iran, which could amplify tension and disrupt oil supply chains, leading to a dramatic shift in market sentiment and FX pricing dynamics.
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 5th of August.
Oil prices have fallen as the optimism bias has been working overtime. There have been more positive noises about Iran and Oman coming to a settlement for the post-war control of the Strait of Hormuz. It seems unlikely that Iran will now give up control and in the long term some kind of toll will probably be charged, although that will perhaps be rebranded as a tariff or maybe an environmental charge, depending on where on the MAGA versus WOKE spectrum Iran's government wishes to position itself.
Economically, a toll is not likely to make any meaningful difference of itself, but the ceding of control over a previously international waterway to Iran does have economic implications in terms of the insurance of freight, the fragility of supply chains and regional infrastructure investment to try and circumvent the Strait. Of course a deal between Iran and Oman does not open the Strait right now. That would require a deal with the United States and there's no reliable information available on when that might take place.
The US economy has, however, been benefiting from a windfall fiscal stimulus, with the unlawful tariffs being turned into rebate payments of around $100bn, with a further $28bn at least waiting to be repaid. The tariffs cost the US economy $165bn, so this is a sizeable proportion of that total. However, it needs to be thought of primarily as a redistribution.
Tariffs were paid by US importers, but ultimately were passed through to the US consumer. So in effect, the US consumer paid the tariffs through higher consumer prices. Those price increases have generally not reversed with the reversal of the tariffs, because firms anticipate new tariffs in the future.
So, the consumer does not get their money back. The importer, who signed the cheques paying the US Treasury in the first instance, gets the money back. This whole episode therefore represents a transfer of wealth from US consumers to US importers of foreign goods, with the US Treasury acting as a middleman in the process.
That can still be considered a stimulus. The high proportion of tariff rebates being paid at least implies that smaller companies are getting their tariff payments back, and that can translate into proprietors' income. Dividend payments may also boost US incomes, though of course will also boost the incomes of foreign shareholders, and rebates can also help fuel investment into the shiny new toy of artificial intelligence.
So, the effect is both a redistribution and a stimulus. China is reportedly looking to collect taxes dating back many years, especially from wealthier citizens, as it seeks to finance its growing budget deficit. This is just the latest iteration of a global trend.
In almost every country, government debt ratios are below record highs, but they are higher than the norms of the past couple of decades. What is at a record high in the global economy is private sector wealth, and that wealth is likely to be mobilised by governments to keep funding debt, generally at an advantageous rate. That can be via taxation, or it can be via financial repression, forcing or encouraging money into domestic bonds.
Financial repression also fits with the rise of economic nationalism, the idea being that domestic investors should buy domestic government bonds first. The consequences of that may be behind the US Treasury actively supporting the Treasury bond market via intervention in the euro-yen exchange rate recently. The data calendar is once again a desolate, barren wasteland, with only the sideshow of sentiment polls generating random numbers.
That's all for today. Have a good day. 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.
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