UBS On-Air: Paul Donovan Daily Audio 'Talking in a trade war'
Lead — The ongoing tensions between the US and China have reached another critical point, with President Trump's anticipated phone call to President Xi, suggesting a potential softening of the aggressive trade stance. Per the full note from UBS, Trump's eagerness for dialogue contrasts with China's reluctance, indicating that both sides might be edging towards negotiations out of necessity. Investors are likely to scrutinize forthcoming US data, particularly in manufacturing, for clues on the trade war's impact. Furthermore, the looming uncertainty around trade could influence US economic indicators such as factory orders that generally reflect heightened sensitivity among companies regarding policy fluctuations.
What the desk is arguing
The prevailing sentiment suggests that Trump's eagerness for negotiation with China could signal a shift in trade policy, which has been harshly criticized for its negative economic ramifications. Per the full note from UBS, this shift comes amidst ongoing high tariffs that are detrimental to the US economy, hinting at a potential need for concessions from both nations to stabilize relations.
Concerns over US manufacturing indicators are rising, with upcoming data expected to show limited strength. This data, including April's factory and durable goods orders, should provide insight into how policy uncertainties are affecting business sentiment and economic performance. Investors are likely to analyze these figures closely, as they may indicate whether companies are adjusting their strategies in response to the evolving trade landscape.
Where it sits in our coverage
The consensus target for the USD/CNY pair is positioned at 1.075, with a range from 1.04 to 1.12 as various firms provide their forecasts. Key targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns with the broader market sentiment that anticipates a cautious approach to trade negotiations. The desk's view is comfortably positioned within the consensus range, suggesting a balanced outlook amid potential volatility.
How other firms see it
Firms such as jpmorgan and goldman appear to support the notion that a softer stance on trade could be forthcoming, while bofa offers a more cautious perspective about the likelihood of significant concessions. The commentary around trade tensions is extensive, affecting multiple currency pairs but especially impacting USD/CNY and USD/JPY trajectories as the market processes any signs of negotiations.
What the calendar says
With no major economic events scheduled in the next 30 days that would significantly impact this trade narrative, market participants should remain focused on the upcoming economic data releases to gauge the trade tensions' economic effects. The outcome of Trump's conversation with Xi this week may be pivotal, as it could set the tone for future policy and market reactions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's eagerness for talks with Xi reflects potential shifts in trade policy.
- 02High tariffs continue to burden the US economy, increasing pressure for concessions.
- 03Upcoming manufacturing data will be pivotal in assessing the trade war's impact.
- 04Investor sentiment remains cautious as parties navigate policy uncertainties.
Market implications
Investors should closely monitor levels around 1.075 for the USD/CNY pair, as any positive signals from the Trump-Xi call could push rates higher. Additionally, the publication of US factory orders and durable goods data may provide crucial insights into the economic impact of ongoing trade tensions.
Risks to this view
A failure to reach a constructive dialogue during the anticipated phone call could lead to further trade escalation and a quick rebound in tariffs, negatively impacting the USD/CNY and creating volatility in broader market sentiment. Additionally, significant negative surprises in the upcoming manufacturing data may also catalyze a reassessment of trade policies and expectations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 3rd of June. After US President Trump strengthened their rhetoric against China and China responded with accusations that trade understandings were being undermined by the United States, there are now reports that Trump will speak with China's President Xi this week.
Trump has been anxious for such a call for some time, Xi it appears has not. Investors might therefore start to speculate about a return to Trump's normal retreat strategy on trade, with concessions necessary on the part of the states to get such a call to come about. It is certainly the case that US taxes on imports from China remain extremely high and will at current levels damage the US economy.
However there has been no sign of a retreat from the latest extreme steel taxes and as ever uncertainty is the dominant theme of US policy at the moment. One of China's manufacturing sentiment polls weakened in May causing some comments in markets. Sentiment data generally is not reliable, sentiment fatigue is real and normal people do not fill in surveys.
However the political bias that increasing partisanship has introduced into western sentiment surveys has less distorting power in China. US factory orders and durable goods orders data is due for April. It is unlikely that there will be too much sign of strength here and investors are going to start poring over these figures for signals about the impact of policy uncertainty on companies planning.
US official data does also suffer from poor survey response rates. The official job openings data that is released today is a government survey with so low a response rate one might possibly think that the data should not be published. Job openings data was distorted post pandemic by an increase in staff turnover.
The figures only report externally advertised jobs not internally advertised jobs. That distortion has now largely disappeared from the numbers putting the labour market back towards its normal patterns of activity. Markets really want to know whether the uncertainty of Trump trade and fiscal policies is causing companies to cut back on hiring.
These data does not show that reliably but reliability is not always necessary for markets to react. There's some central bank chatter today with Bank of Japan Governor Wada due to give a speech as the Bank of Japan is pretty much the only central bank of the major economies that is looking to increase interest rates in the forecastable future. These comments are obviously of some interest.
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