UBS On-Air: Paul Donovan Daily Audio 'Tech vibes'
The desk assesses that declines in technology stocks, highlighted by the 8% drop in South Korean equities that halted trading, reflect deeper market concerns but do not yet affect consumer behavior significantly. As indicated in UBS's research, consumer spending remains stable, supported by substantial cash savings, which have lessened the wealth effect typically associated with falling equity prices. The desk emphasizes that while prolonged weakness in the tech sector may eventually lead to a shift in investment patterns, such changes could facilitate a more balanced allocation towards productive projects beyond just tech investments. This overall perspective aligns with recent US consumer data demonstrating a resilience in spending habits despite market volatility .
What the desk is arguing
The desk frames the current weakness in technology stocks as indicative of broader market sentiments but not yet impactful enough to shift consumer behavior. Per the full note from UBS, the ability of consumers to maintain spending through saved cash acts as a buffer against equity declines, suggesting economic fundamentals remain intact for now.
Supporting this view, recent US data underscores that consumers have been relying on cash savings, which have provided a cushion against the impacts of market movements. For instance, the ongoing reliance on savings indicates that the actual consumer spending dynamics remain robust, despite fluctuations in equity markets.
While a sustained downturn in the technology sector could prompt a reevaluation of real-world investments, this does not necessarily spell economic doom. It may instead release capital towards potentially more immediate productive opportunities, as emphasized in the commentary by UBS.
Where it sits in our coverage
Consensus targets across several firms suggest a range where major currencies like EUR/USD are positioned. Our current collective target sits at 1.075, with a range spanning from 1.04 to 1.12, notably alongside predictions from firms like: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This alignment indicates that while the desk's perspective on tech stocks does resonate with broader market consensus, it remains cautious, knowing that volatility in this segment could influence currency pairs in the coming weeks.
How other firms see it
Several firms appear to align with this cautious view, particularly regarding technology’s impact on the macroeconomic landscape. Notable aligned firms include jpmorgan, while bofa takes a contrary stance with a more pessimistic outlook on consumer spending and tech investment.
Relevant market indicators include the EUR/USD trajectory, which could be influenced by ongoing shifts in tech investment patterns as highlighted by the potential stabilization or further decline in equity prices over time. Watch for spillover into broader currency markets as these dynamics unfold.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Technology stocks are experiencing significant weakness, highlighted by an 8% decline in South Korea.
- 02Consumer spending remains unaffected due to strong cash savings acting as a buffer.
- 03Extended weakness in tech could redirect capital towards more immediate productive investments.
- 04Apple’s price increases amid this tech downturn reflect the ongoing tension between inflationary pressures and consumer spending.
Market implications
Watch for any signs of sustained pressure in technology stocks impacting consumer sentiment. A critical level for USD could be monitored, particularly if cash savings among consumers begin to dwindle, indicating shifts in spending behaviors ahead of broader economic data releases.
Risks to this view
The primary risk to this call hinges on a rapid deterioration in consumer confidence, which could be triggered by an extended market downturn in equities. If consumers begin to feel the weight of stock market losses, such a shift could necessitate a reevaluation of spending patterns and investment strategies.
Good morning. This is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 26th of June.
There have been further declines in technology stocks, which is animating financial media. Trading in the Korean Kospi was halted after an 8% decline. As with earlier declines, we are not at a level where this will translate into something that most consumers are going to care about.
The only technology Northern European consumers care about at the moment is a handheld fan. Limited exposure to equities by the majority of consumers mutes any wealth effect. And yesterday's US data reminded us that consumers' willingness to reduce the amount of cash saved each month has been the main and most important driver to the consumer spending story of late.
The fact that cash has been saved each month gives a cushion for consumer spending regardless of equity moves. A more prolonged period of weakness around technology might alter the patterns of real world investment spending, however. This is not necessarily an economic negative.
To the extent that tech spending has cannibalised other forms of investment, a slower pace of tech investment growth might then free up resources for other projects. Moreover, in the short term, non-AI projects are likely to be more immediately economically productive. A factory contributes positively to the economy as soon as it starts operating.
That is not necessarily the case for an AI dental centre. Apple announced that they were introducing some substantial price increases across a range of products in the United States. Apparently the nice shiny toy of artificial intelligence is pushing up the costs for the old toys of iPads and other such devices.
One company introducing even noticeable price hikes would not necessarily attract too much attention, and the weighting of this in consumer price inflation is fairly minimal. But the political context of this does matter. At least with a certain demographic, the iPhone or iPad is a highly visible item, and while not perhaps a high-frequency purchase, there is likely to be sensitivity to this against the backdrop of a US affordability crisis.
As affordability is about prices, incomes and what people aspire to buy, the aspiration aspect could be heightening the importance of this particular price move. So far, protests against data centres have been focused around electricity pricing and environmental costs, but the sense of political hostility to AI may broaden further if this is not an isolated instance. Final Michigan consumer sentiment data, which includes an inflation expectations number, is due from the states today.
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