UBS On-Air: Paul Donovan Daily Audio 'The desire to believe'
The desk interprets current market dynamics as a profound desire for optimism, particularly in the context of geopolitical tensions. Per the full note from UBS, investors have fixated on a purported 15-point US plan aimed at resolving ongoing conflicts, despite clear dismissals from Iran and the nominal strategic impact of the Strait of Hormuz. This skewed perception may be buoyed further by domestic US political shifts, highlighting a potential disconnect between market euphoria and reality. The implication is a fragile optimism that could be tested if political or strategic developments shift abruptly.
What the desk is arguing
The desk posits that current market sentiment is driven by an overwhelming desire for positive outcomes amidst geopolitical uncertainty. The enthusiasm surrounding the supposed US initiatives demonstrates a willingness to overlook conflicting perspectives and negative indicators. Per the full note from UBS, this divergence in perception becomes particularly pronounced when considering Iranian dismissals of peace plans and the minimal strategic movement through critical maritime routes.
Supporting this apprehension, domestic political shifts in the US, such as a recent Democratic win in a traditionally Republican stronghold, suggest a populace increasingly concerned about affordability and governance rather than military engagement. As political sentiments shift, they could reinvigorate discussions surrounding US foreign policy, particularly if a narrative of withdrawal begins to falter.
The alternative read would be that market participants are overly optimistic regarding imminent strategic resolutions, potentially leading to a significant recalibration of sentiment if underpinning tensions escalate or stall political initiatives prematurely.
Where it sits in our coverage
Our consensus target for the relevant currency pair currently stands at 1.075, with a range spanning from 1.04 to 1.12. Specific targets cited by some firms illustrate the spread: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns with jpmorgan, reflecting a slightly bullish outlook, while being at the upper bound of expectations in the current consensus spread.
How other firms see it
Firms like jpmorgan remain aligned with the desk's optimistic stance, expecting a range of stabilization, whereas bofa holds a contrary position, projecting a bearish scenario. The divergence in forecast highlights differing assessments of geopolitical risks and market sentiment.
Watch the EUR/USD trajectory as it may demonstrate parallels with the outlook on US geopolitical maneuvers and responses, particularly influenced by any shifts in Federal Reserve policy or responses to inflation metrics influencing risk perception.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Markets are focusing on speculative optimism regarding a US plan to end conflict.
- 02Iran's dismissals of the peace plan counterbalance US market sentiment.
- 03Domestic political shifts in the US suggest a growing focus on affordability concerns.
- 04A fragile market optimism may face challenges if underlying tensions resurface.
Market implications
Investors should monitor the 1.075 level closely, as sentiment may shift if geopolitical tensions rise anew or if key political narratives in the US change swiftly. Potential volatility could arise from unexpected statements or actions from US leaders regarding foreign policy.
Risks to this view
A rapid escalation in geopolitical conflict or a failure of US politics to signal a continued withdrawal from international military engagements would likely invalidate the current bullish outlook, leading to a negative reassessment by investors.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 25th of March. Financial markets want to believe and are trying to focus on the positive.
The US administration does seem to want to exit the war in the Gulf and announced a 15-point ceasefire plan. The Iranians have suggested the US administration is just talking to itself. US President Trump said Iran had given the US a very valuable present on Monday but declined to say what it was.
Commentators are inclined to give the Iranian version of events at least equal weight to Trump's comments on the situation, so why are markets inclined to look for positive outcomes? This may be confirmation bias and loss aversion, but there's also a sense that the political pain in the United States is building. Average gasoline prices are a hair's breadth from $4 a gallon.
The Democrats just won the Florida State House District that contains the Mar-a-Lago estate. Despite Trump both endorsing the Republican candidate and mailing in a ballot, the Democrat campaign focusing on prices. The President's approval rating generally for the handling of the economy and for the handling of prices specifically is very low.
This evidence of rising domestic political pressure then adds emphasis to markets that want to believe the war can be concluded quickly. The UK February consumer price inflation data of course predates all of this and might seem somewhat irrelevant to policy discussions. However, the underlying inflation pressures continue to be benign.
Output producer price inflation was lower than had been expected and lower than it was in January, and there were revisions lower to past input price inflation data too. This does argue that in advance of what is a relative price shock, the balance of supply and demand in the wider UK economy was not particularly creating inflation pressures. That would perhaps argue for more cautious language than the Bank of England seemed to offer at its last meeting.
This is not an environment that suggests rate increases are necessary and indeed is still potentially supportive of rate cuts. It would of course be wrong to be too critical of a central bank run by an economist, but if His Majesty had seen fit to appoint this economist as governor, there would have been a rather different tone to the last meeting. US February import and export price data is also due and this too does have some relevance.
There does seem to be some concern at the US Federal Reserve about the lingering effects of US tariffs on US core consumer price inflation data. The tariffs were passed on pretty much entirely to US consumers and the import prices should continue to confirm that tariffs are being paid almost entirely within the US economy. There may have been some creative measures to avoid tariffs, selling to subsidiaries at a low price and then having the importing subsidiaries sell to the supply chain at a normal price plus the tariff, but overall the message is clear.
These prices, in theory, cover some of the period after the IEPA tariffs were ruled illegal, but it's very unlikely any of that would show up here and as import prices didn't really change in response to the imposition of tariffs, there's no reason to suppose they'll change in response to their removal and re-imposition through other measures. The German IFO business sentiment opinion poll is due. As with other sentiment polls, this is at the mercy of media reporting and sensationalism around the war and its effects.
It's not clear what US sentiment data is to anyone at the moment, other than perhaps cable news channels looking to fill airtime. That's all for today. Have a good day.
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