UBS On-Air: Paul Donovan Daily Audio 'Tariffing Hormuz traffic?'
The current commentary from UBS flags a potential shift in US foreign policy under President Trump, specifically regarding the US military presence in the Gulf and implications for the Strait of Hormuz. Per the full note, the market is responding optimistically to the idea of a US withdrawal, yet it overlooks the likely reality of increased Iranian control, which may lead to higher shipping costs akin to tariffs. This scenario underlines the broader geopolitical context influencing oil prices and economic dynamics in Gulf countries, as noted in the source commentary.
What the desk is arguing
The desk posits that the potential US withdrawal from the Gulf could deflate direct military involvement while elevating Iranian leverage over shipping routes in the Strait of Hormuz. The optimism observed in futures markets may be misplaced as investors might ignore the subsequent economic ramifications of an Iranian 'toll' for passage, affecting oil prices and trade flows.
Paul Donovan's analysis indicates that while the market is buoyed by the prospect of reduced US military engagement, it fails to account for the potential for increased costs in oil supply chains. Specifically, the notion of Gulf countries encountering elevated oil prices due to a toll regime raises concerns about inflationary pressures on the global economy.
Where it sits in our coverage
Our consensus target for relevant currency pairs is positioned at 1.075, encompassing a range between 1.04 and 1.12. Specific targets from notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This viewpoint is somewhat aligned with jpmorgan, which emphasizes stable pricing in light of geopolitical tensions, although the outlook diverges from bofa, which forecasts more conservative figures based on potential economic fallout from increased geopolitical risks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market optimism surrounding US withdrawal may overlook Iranian dominance over shipping costs.
- 02Higher prices from Hormuz tolls are likely to impact global supply chains and inflation.
- 03Gulf states face challenges in military spending and economic diversification amid escalating costs.
- 04US taxpayers may bear the costs of foreign military engagement, complicating political narratives.
Market implications
Traders should closely monitor the oil price responses, particularly as elevated shipping costs could reshape market dynamics. Watching the EUR/USD take shape during this geopolitical transition will be crucial, especially in correlation with oil price movements as central banks adjust for inflationary pressures.
Risks to this view
Any sudden escalation in military conflict or UN-sanctioned interventions could radically shift the current landscape, leading to substantial changes in oil supply routes and pricing mechanisms. A reversal in US policy, especially if accompanied by renewed international coalition actions, would invalidate the current bullish sentiment.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Tuesday the 31st of March.
Investors seem to be quietly humming Monty Python's, Always look on the bright side of life. A report in the Wall Street Journal suggests that US President Trump is contemplating a retreat from the Gulf War, with Iran still in control of the Strait of Hormuz. Futures markets have reacted with cautious optimism to the idea of a US withdrawal and seem content to put to one side the issue of Iranian control of Hormuz, something that would presumably lead to taxes on shipping passing through it, a bit like US tariffs but for imports and exports to and from the region.
This may end up being the middle way, physical supply resuming, with a lag because of damage to infrastructure etc, but with a higher price for oil coming out of the Gulf to reflect an Hormuz toll. Iran appears to have successfully hit a fully laden oil tanker off the coast of Dubai, which is a reminder that there is more than one side to a war. The US White House press spokesperson has said that the United States might ask countries in the Gulf to pay for the war.
The cost to US taxpayers so far has been quite sizeable and that is something that may be a focus ahead of the US mid-term elections. However, the idea that Gulf countries will be eager to pay for a war they were not consulted about at the same time as they have to pay for reconstructing damaged infrastructure, rearming and expanding defence capabilities and attempting to resuscitate the non-oil sectors of their economies might be quite a challenge. Economically, the question is whether Gulf countries will direct their military budgets towards buying US-manufactured weaponry, or whether this experience might pivot their purchases elsewhere, as has been the case with European defence procurement for instance.
That would mean that petrodollars would be increasingly recycled into other currencies. German inflation data yesterday showed the expected impact of the war on spending power with the headline consumer price reading ticking up. The damage may be less than the headline actually suggests as consumption patterns adjust, but there is certainly damage being done.
Japan's March Tokyo inflation data did not show the same effect, as government subsidies for electricity and gas have muted the impact there. As those subsidies fade – they're set to halve in the April data – the cost of war will become more apparent to the Japanese consumer. The government of South Korea, which has already imposed an energy price cap, is set to put in place another budget to subsidise energy prices still further.
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