UBS On-Air: Paul Donovan Daily Audio 'The spoils of war'
The desk interprets the recent UBS commentary by Paul Donovan as suggesting that market optimism regarding a potential ceasefire may be overextended, as it risks mispricing the geopolitical risks associated with not only ongoing negotiations but the fundamental instability of the region. Per the full note, Donovan points out that the market's positive reaction to a ceasefire announcement is predicated on a narrative of returning to normalcy rather than addressing the complex geopolitical landscape, particularly around Iran's nuclear ambitions. The desk notes that domestic political pressures in the U.S. could further complicate this narrative, with polls indicating widespread unpopularity of ongoing conflicts, reflected in infrastructure like gas prices exceeding $4 per gallon. This context suggests a more cautious approach may be warranted in trading strategies as developments unfold.
What the desk is arguing
The desk frames this analysis as a warning against complacency in light of recent optimistic market sentiment regarding a potential ceasefire. Donovan emphasizes that financial markets appear to be pricing in not merely a ceasefire, but a full cessation of hostilities, which is far from guaranteed. This sentiment reflects a somewhat naive approach to the complexities involved, particularly considering Iran's leverage in negotiations as it pertains to nuclear enrichment and regional dynamics.
Moreover, the commentary highlights the mistrust directed at the U.S. administration, which complicates any prospect of successful long-term agreements. Given these dynamics, the desk points out that the return to pre-war business conditions may not happen as swiftly as the market presently anticipates, further supported by domestic U.S. political pressures that could affect foreign policy stances going forward.
Where it sits in our coverage
Our consensus target for the EUR/USD reflects a range from 1.04 to 1.12, with jpmorgan projecting a target of 1.10 for Mar-26, and bofa setting a more conservative target at 1.04. This spread indicates a divergence in expectations regarding the euro's trajectory against the dollar, influenced by broader geopolitical developments.
The desk’s view aligns more closely with jpmorgan, suggesting a somewhat bullish stance, albeit recognizing the substantial downside risks posed by persisting geopolitical tensions and U.S. domestic political considerations, which could lead markets to reassess this bullish outlook.
How other firms see it
Several aligned firms, including jpmorgan, contend that any resolution to the ongoing conflict could support upward pressure on the euro. Conversely, firms like bofa take a more pessimistic view, emphasizing continued uncertainty in the region, which could undermine any existing recovery narratives.
Traders should monitor the EUR/USD closely due to its sensitivity to geopolitical events and corresponding shifts in U.S.-Iran relations, as well as broader implications from the U.S. domestic political landscape.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market optimism around a ceasefire risks underestimating geopolitical complexities.
- 02Iran’s nuclear negotiations remain a significant sticking point that could disrupt peace efforts.
- 03Domestic U.S. political pressures, including rising gasoline prices, are likely to influence foreign policy decisions.
- 04Investors should adopt a cautious viewpoint amidst high uncertainty levels.
Market implications
Traders should watch the EUR/USD pair for signs of volatility, particularly as new developments in U.S.-Iran relations unfold. The current target range of 1.04 to 1.12 offers significant levels to monitor as sentiment shifts could test these boundaries based on geopolitical news.
Risks to this view
A significant risk to this analysis includes an unlikely but possible escalation in conflict or breakdown in further ceasefire negotiations, which could shift market sentiment rapidly towards a bearish outlook for the euro. Additionally, strong dissent within U.S. political circles that leads to abrupt foreign policy changes could also destabilize any expectations of a ceasefire being upheld.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 8th of April. Throughout this war, financial markets have been inclined to the optimistic, wanting to see the oil barrel as half full rather than half empty.
It is therefore not surprising that a ceasefire announcement has created such a positive reaction. The risk is that financial markets price in not a ceasefire, but a complete end to the war, and try and price a return to business as normal. An end to the war is not certain.
Iran's condition include nuclear enrichment programmes, which might prove to be a sticking point. There is already a dispute over whether the ceasefire includes Lebanon. Pakistan says it does, Israel that it does not.
However, it might be helpful to consider what caused US President Trump to retreat from a very aggressive escalation stance. Trust in agreements made by the current US administration tends to be very low, so if the motives for the US shift stay in place, there's a better chance of a lasting peace. Certainly, the political pressures in the United States have been building.
Polling shows that the war is very unpopular, and with average gasoline prices comfortably over $4 per US gallon, the affordability crisis is very present in voters' minds. The Republicans experienced a significant defeat in elections for the Wisconsin Supreme Court yesterday, and while care should be taken in reading too much into local votes, the near 20-point margin of victory for the Democrats in a key swing state is obviously a signal. There had also been calls from across the political spectrum for Article 25 of the Constitution to be used against Trump, and while very unlikely to have been acted upon, that is not a normal occurrence.
International attitudes towards Trump's latest comments on the war were also unusually strong. Added together, this domestic political pressure increases the plausibility of a more lasting settlement being reached. If we do see a lasting settlement, clearly things do not go back to normal.
The Strait of Hormuz is reopening, but on Iranian terms. There has to be coordination with the Iranian Revolutionary Guard, and a toll will have to be paid. Estimates suggest the toll would be around $2 million per ship, which would add a dollar a barrel to the cost of oil being shipped on larger tankers, and up to $2 a barrel for smaller tankers.
This is not an economically significant cost. It would be cast as reparations, although reparations are normally paid by the defeated, not by passers-by. The interesting question is where the money is then spent.
Sources & References
How we cover this story