UBS On-Air: Paul Donovan Daily Audio 'Three reasons why'
The potential delay in President Trump's proposed tariffs on European goods continues to cast uncertainty over financial markets and FX trading strategies. Per the full note from UBS, the president's history of fluctuating policy stances has led to negative market reactions despite a high probability that these tariffs will eventually be postponed. This is due to the immediate supply chain disruptions and a broader market need to factor in a risk premium for any future policymaking volatility. Investors should remain vigilant about how these political developments could influence risk appetite and asset positioning in the near term.
What the desk is arguing
The desk posits that the delayed tariff proposals signal ongoing stress in U.S.-EU trade relations, which could elevate risks in global markets. Given Trump's history of retraction from aggressive trade policy, investors might be rationally skeptical, yet the volatility and uncertainty prompted by these announcements require attention from market participants. Per the full note from UBS, the increased unpredictability necessitates a risk premium that could impact currency valuations.
This assessment aligns with broader research on supply chain impacts, where immediate Effects of tariffs, regardless of their ultimate implementation, manifest through increased logistics costs and inventory adjustments. Thus, the potential for inventories to be altered as firms stockpile to mitigate risks from these threats raises broader concerns about inflation and cost management in the U.S. economy.
The alternative read would be that investors could become desensitized to tariff threats, potentially downplaying their impact on markets, but current reactions suggest otherwise. As long as volatility persists, markets are likely to respond sharply to any aggressive trade rhetoric or actions from the administration.
Where it sits in our coverage
Our consensus target for the EUR/USD is 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's interpretation aligns with jpmorgan's outlook but diverges from bofa's more cautious stance, indicating opposing views on how forthcoming policy influences EUR/USD movements in the coming months.
How other firms see it
Firms such as jpmorgan and citi seem to align with the desk's outlook, highlighting concerns over trade policy and its ripple effect through market volatility. In contrast, bofa holds a more bearish perspective, predicting a stronger dollar amidst ongoing uncertainty.
A closely related currency pair to monitor is GBP/USD, as movements within the Eurozone have a direct influence on the British economy and the dynamics in the pound's valuation as Brexit negotiations evolve. Additionally, investor sentiments regarding trade relations could also affect the AUD/USD given Australia’s ties to both the U.S. and EU markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's tariff delays highlight persistent volatility in U.S.-EU trade relations.
- 02Market responses may still be pronounced even with high probabilities of policy retraction.
- 03Increased risk premiums need to be priced in due to ongoing uncertainties.
- 04Supply chain disruptions could influence inflation and logistical strategies for firms.
Market implications
Watch for how the EUR/USD reacts in the face of any new trade announcements, specifically monitoring a key resistance level of 1.08. Investor sentiment may be impacted, leading into the next liquidity event or relevant commentary from U.S. officials.
Risks to this view
A sudden change of course in policy or a significant announcement regarding tariffs that does not align with expectations could force a rapid reassessment of positions across risk assets, leading to sharp moves in currency valuations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Monday the 26th of May. U.S. President Trump retreated from their proposal to aggressively tax U.S. consumers of European products, delaying the threatened 50% tariff on imports until July.
Trump's repeated retreats on tariffs have become frequent enough that it raises questions as to why the markets continue to react negatively to the initial announcement. Rationally, investors must place a very high probability, bordering on certainty, that Trump will retreat from any aggressive tariff announcement, and yet risk assets were sold after Friday's social media posts. There are three reasons why markets are likely to continue to react to such policy announcements.
First, a tariff threat, however unlikely to last in the longer term, has the potential to disrupt supply chains and create distortions in the short term. As long as the threat exists, businesses have to act in a way that provides some insurance against even the remote possibility of Trump following through on their threats. For instance, firms might seek to stockpile imported components ahead of a tariff threat, diverting supply intended for other markets, to push into U.S. warehouses.
Such insurance action will increase costs and complicate logistics. Second, Trump's announcements are a signal about policymaking in a broader sense. Wild swings in policies create uncertainty in multiple fields, and that requires assets to price a risk premium.
The more uncertain the policymaking is in general, the greater the risk premium will need to be. In addition, Trump's policy announcements also act as a signal about who might be influencing the president. Investors perceive two factions on trade, a generally conventional view headed by U.S.
Treasury Secretary Besant, and a more radical view focused on U.S. Trade Representative Navarro. If policy announcements suggest that the more radical faction is influencing Trump, then there will be more concern in the financial markets.
Markets tend to favor the conventional over the unpredictable disruption of the extreme. Third, even with the almost inevitable reversal of aggressive tax policies, there may be damage in terms of popular perception. The media spotlight naturally tends to focus on the sensational, and the potential economic damage of Trump's trade policies is pretty sensational.
The retreats are less entertaining and get less attention. This may influence the perception of consumers. For instance, anecdotal evidence suggests that some consumers blamed rising coffee prices on Trump's threatened taxes on Colombian imports, even though the Colombian tariff policy was one of Trump's fastest and earliest retreats, and the price increases for coffee were driven by other factors.
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