UBS On-Air: Paul Donovan Daily Audio 'The state of the world'
The desk's view highlights the potential market implications stemming from President Trump's State of the Union address, specifically regarding tariffs and Congressional support, as noted by UBS Chief Economist Paul Donovan. The emphasis is on whether written remarks will unveil new tariff threats, potentially impacting market sentiment more than casual comments. Notably, Trump’s approval ratings have declined, leading to likely resistance from Congressional Republicans regarding continued tariffs, which would create a mixed signal for investors, as reported by UBS. This interplay between political tone and economic reality could inform trading strategies if new policies emerge or fail to gain traction.
What the desk is arguing
The desk posits that Trump's upcoming address could create volatility, particularly if renewed tariff threats are articulated in the written speech. According to UBS's insights, stronger language regarding tariffs could materially affect investor confidence and the economic outlook arising from consumer perceptions, which are often skewed by broader narratives rather than personal experiences.
The current political climate complicates the tariff landscape, as Congressional support appears to be waning. UBS notes that House Speaker Johnson's comments indicate a lack of enthusiasm for further universal tariffs from Congress, suggesting that market participants should be cautious about assuming a continuation of the current tariff regime.
Where it sits in our coverage
Given our internal expectations, we see the USD/EUR consensus target set around 1.075, with a range of 1.04 to 1.12. Key firms include: - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26
This aligns closely with UBS's projections, reinforcing a sentiment that tariffs and trade discussions will heavily influence currency dynamics moving forward, particularly at the lower bound of current ranges.
How other firms see it
The market sentiment is largely influenced by firms like jpmorgan and bofa, which view the potential broadening of tariffs as a critical economic factor. However, the stark divergence in expectations regarding trade policy showcases the uncertainty surrounding Trump’s direction on tariffs and its broader economic impact, with bofa holding a more cautious stance.
Pairs like EUR/USD or GBP/USD could reflect this evolving sentiment in response to both local sentiment shifts and external economic policies, especially as they relate to trade dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's State of the Union could signal new tariffs.
- 02Congressional support for tariffs appears to be diminishing.
- 03Market movements will be heavily influenced by trade sentiments.
Market implications
Traders should closely monitor the content of Trump's address for any new tariff announcements or significant policy shifts. A strong reaction could see the USD/EUR rates test critical levels around 1.04 or soar towards the upper band of 1.12, depending on market interpretation of the address.
Risks to this view
A failure to produce any substantial news or further Congressional roadblocks could blunt any immediate impact from the address, potentially stabilizing the USD/EUR exchange rate. Additionally, an unexpectedly positive reception from Congress could invalidate bearish sentiment towards tariffs.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Tuesday the 24th of February. Today US President Trump will deliver the State of the Union Address to Congress.
Normally, this is not a matter that interests financial markets greatly, however on this occasion there are two points of interest. The first is whether there are more tariff threats from Trump beyond the 15% universal tariff. This has been hinted at by the President.
The State of the Union comes as EU officials are suggesting that the latest US tariff upheaval breaks their, as yet unratified, trade deal with the US. While an off-the-cuff remark from Trump would probably not impact markets too much, something in the written speech would carry weight as being something that administration officials might implement or might indeed have proposed. The second issue is the response from Republican members of Congress to the address.
The President's approval ratings have fallen over the course of the last year, even it seems amongst registered Republicans. US House Speaker Johnson has indicated that it is unlikely that Congress would vote in favour of continuing universal tariffs as they would have to do to allow the 15% universal tariff to continue. Part of the problem for Trump is that there is a difference between perception and reality.
This is one of the reasons why sentiment polls and purchasing managers indicators have become progressively less useful as inputs into the economic forecasting process. In a world of soundbites and hashtag economics, media has sensationalised the narrative and that shapes perceptions. Consumers feel that everything is terrible everywhere else, but things are not so bad for them.
But with their eyes glued to their smartphones, it is the broader perception, not the personal reality, that dominates consumers and politics. This is especially true with the affordability crisis in the States, and here there is a real problem. People know grocery prices are not coming down, and in fact are still rising.
They know electricity bills are substantially higher than they were a year ago. Asserting that these prices are coming down just fuels mistrust. US voters also do not recognise that used car prices are marginally lower, because most US households have not bought a used car in the last 12 months.
The same applies to the falling price of televisions. Perceptions and reality are not the same thing. The gap between perception and reality is common across all major economies.
In the UK, it is further complicated by the fact that reality as reported and reality as it actually is are not necessarily the same thing. The real reality being stronger than is initially reported. This complicates policy decision-making.
There are four members of the divided Bank of England Monetary Policy Committee who are testifying to Parliament today, and with anticipation high around rate cuts, especially as inflation slows markedly, this is of interest to investors. There is also a cacophony of noise from the US Federal Reserve, with no fewer than 8 appearances by six members of the FOMC. The Fed is becoming almost British in its divisions, adding interest.
We also hear from ECB President Lagarde again. Lagarde spoke yesterday and over the weekend. It is unlikely that markets will find much novelty in today's remarks.
Today also marks the fourth anniversary of Russia's invasion of Ukraine. Despite bold promises on the part of some world leaders, peace seems a relatively remote possibility. Russia has been losing territory recently, or more accurately, has been losing territory it claimed to hold.
The human cost of any war should always be the priority, but the conflict is a reminder of the ability of humans and the wider global economy to adapt in the face of adversity. That includes finding ways around sanctions. The fact that German 2025 exports to Kazakhstan were more than four times the value they were in 2021 may not be entirely due to the efforts of German marketing.
It includes adapting to the insecurity of gas supplies. It includes adjusting global trading patterns. Geopolitics often creates dramatic effects which have more muted economic consequences.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
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