UBS On-Air: Paul Donovan Daily Audio 'Uncertainty continues'
The ongoing uncertainty surrounding US policies is set to impact market decisions, especially as mixed signals continue to emerge from the Trump administration. As noted by Paul Donovan of UBS, apparent contradictions on immigration policy and international relations, particularly regarding Iran, illustrate this lack of clarity. This environment may hinder US firms from making long-term investments. Per the full note , the strong employment report from last Friday poses further complexities, as it contrasts with voting motivations revealed in exit polls, suggesting economic performance is a nuanced driver of political sentiment.
What the desk is arguing
The desk maintains that heightened policy uncertainty from the US administration will create volatility in the FX market, particularly in response to geopolitical developments and economic data releases. As per the full note , mixed signals about immigration and Iran illustrate the confusion surrounding policy direction, a situation likely to dissuade investment commitments by US firms.
This uncertainty is underscored by an apparently strong US employment report that diverges from the narratives emerging from midterm election exit polls. These polls indicate that despite the positive economic indicators, voters expressed discontent; thus, the FX market is likely to react cautiously to future information releases.
Where it sits in our coverage
Currently, the consensus target for the EUR/USD pair sits at 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s position appears to align closely with jpmorgan's projection at the higher end of the spectrum, suggesting a bullish outlook amidst current uncertainties, contrasting with bofa, which maintains a more cautious stance.
How other firms see it
Firms like jpmorgan are generally aligned with the thesis of sustained uncertainty impacting investment patterns, while bofa adopts a more bearish view, emphasizing risks of economic discontent among voters.
Closely monitor developments in USD/JPY as it could exhibit movements reflective of US policy shifts, particularly in light of the Fed's upcoming monetary policy outlooks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US policy uncertainty continues to cloud the market outlook.
- 02Strong employment data contrasts with political sentiment, fostering potential volatility.
- 03Investors may avoid long-term commitments given mixed signals from the administration.
- 04Watch for developments in USD/JPY as a barometer for FX reactions.
Market implications
Focus on levels around 1.075 for EUR/USD, as uncertainty over US policies and geopolitical responses may provoke fluctuations around this benchmark. Given the lack of scheduled high-impact events, market volatility could persist due to speculative trading and reactionary moves to news flows.
Risks to this view
A significant catalyst that could invalidate this outlook would be a clear and decisive policy direction from the administration that resolves current uncertainties around immigration or foreign affairs, potentially stabilizing investor confidence. Additionally, an unexpected economic downturn could exacerbate market sentiment.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 9th of November. The evidence of the weekend suggests that markets are going to have to continue to expect policy uncertainty from the US administration.
US President Trump suggested that the administration's immigration policy might have been too harsh, though the new Chief of Staff Miller is generally regarded as holding extremely strong views on this topic. Trump suggested that strikes against Iran were unlikely, but the current US Secretary of State, Rubio, said that Iran's demands were, quote, outrageous and a diplomatic agreement may not be possible. The level of uncertainty is perhaps demonstrated by Trump's suggestion that the ultimate fighting championship had become the next press secretary for the White House.
This was apparently supposed to be a joke, but it was taken credibly. This ongoing uncertainty has implications for how markets will be reacting to announcements about Iran, for instance. It also has implications for the willingness of US firms to commit to longer term strategies around investment.
The economic data doesn't necessarily provide that much certainty either. Friday's US employment report was strong, but it presents an element of inconsistency with the midterm elections. While people have many complex motives when casting a vote, the exit polls suggest that the straight of the economy was the principal motive for voting, clashing somewhat with the economic strength that is suggested by the employment data.
Of course, the data may well be revised in the future. It may also be that social media exaggerates smaller economic problems and visibility therefore has to be considered a catalyst. Of course, the affordability crisis in the States is an ongoing concern.
The average earnings number in the employment data implies that wage growth is still below that of inflation and significantly below that of inflation perceptions. Affordability is about perception, not about actuality, and so that does matter. China's consumer also seems to be unhappy about the state of their economy.
And unlike the US consumer, that unhappiness has translated into ongoing lacklustre consumer demand. The headline and core inflation numbers for October were both lower than expected, although energy costs have pushed up producer prices further up the supply chain. Food prices remain part of the reason for the more subdued consumer inflation, and that underscores that this is very much a parochial affair.
Sources & References
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