UBS On-Air: Paul Donovan Daily Audio 'War and trade war costs'
The desk asserts that geopolitical tensions in the Gulf, particularly Iran's suspension of negotiations with the U.S., are injecting volatility into oil prices, which may influence broader market dynamics. Per the full note by Paul Donovan from UBS, the increase in oil prices is already imposing direct cost pressures on U.S. farmers, compelling the White House to reduce tariffs on agricultural equipment. Such adjustments, while immediate, do not provide relief for farmers facing war-related pricing challenges. The absence of significant upcoming economic events leaves traders to navigate these geopolitical undercurrents with limited guidance.
What the desk is arguing
The desk posits that rising oil prices, spurred by escalating tensions in the Gulf, are likely to weigh on economic sentiment, particularly in the agricultural sector. Per the full note from UBS, the U.S. government's shift in tariff policy seeks to mitigate some of these pressures but does not address the underlying costs imposed by geopolitical events.
Additionally, the relationship between conflict and commodity prices is underscored by current inflationary trends affecting producers. According to Donovan, the hike in oil prices is already altering the cost structure of farming, further compounded by tariffs that only provide relief for future investments, not ongoing operations.
Where it sits in our coverage
Our consensus target reflects a potential USD rally against the backdrop of these geopolitical developments, with a target range centered at 1.075. Specific firm forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's view is aligned with jpmorgan, positioning towards the higher end of the spectrum as geopolitical risks amplify volatility.
How other firms see it
Firms like jpmorgan are aligned with the understanding that geopolitical tensions will bolster oil prices and thus the dollar’s strength, while bofa maintains a cautious stance, forecasting a lower target amid economic concerns. Traders should monitor USD/CAD as it directly correlates with oil price fluctuations, highlighting the interdependencies in this market environment.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Iran's halted negotiations escalate Gulf tensions, impacting oil prices.
- 02Tariff reductions aim to alleviate pressure on U.S. farmers amidst rising costs.
- 03Geopolitical risks are driving market volatility, with limited near-term economic data.
- 04Watch USD/CAD as an indicator of oil's influence on currency positioning.
Market implications
Traders should remain vigilant around oil price movements, particularly levels above $75 per barrel, as they could indicate further dollar strength. This volatility could shape USD-related trading strategies ahead of any unexpected geopolitical developments.
Risks to this view
A significant de-escalation of tensions in the Gulf or a rapid stabilization of oil prices below $70 could diminish the dollar's safe-haven appeal, prompting a reassessment of our current outlook.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 2nd of June. The markets reacted to news around the Gulf War yesterday because the news came from the Iranian government, or rather as close to the Iranian government as most news stories ever come, that is to say via the semi-official press agency stories.
Iran apparently stopped talking to the United States because of Israel's ongoing attacks in Lebanon. US President Trump then announced that Israel and Hezbollah had agreed not to fire at each other. Accounts differ as to the conversation Trump had with Israeli Prime Minister Netanyahu.
Opinions differ as to whether Trump has any ability to influence the situation. The result was a relative drift higher in the oil price. Higher oil prices will affect farmers directly because running a tractor can be quite fuel intensive and indirectly through things like fertiliser pricing.
Trump has responded to these price pressures arising from the war by changing the price pressures arising from the trade war, cutting tariffs on imported agricultural equipment from 25% to 15%. That will lower costs to US farmers as they're the ones who would be paying the tariffs but it only lowers the cost for farmers contemplating capital investment in the near term. Farmers just trying to get on with growing crops face the war policy costs without benefiting from any relief on the trade war policy costs.
Tariffs on steel and aluminium were altered to, quote, rebuild the nation's industrial base. US factory construction has slowed significantly since January 2025. Euro area consumer price inflation data for May is not likely to excite financial markets very much.
This is partly because the data has been preempted by the various provincial releases across the euro empire and partly because the European Central Bank seems determined to commit a policy error at its next meeting by raising rates in a way that will have no effect on inflation or inflation expectations. The United States is releasing labour market data or rather what pretends to be data in the form of the job openings layoff and turnover survey. If these numbers were accurate they'd be really helpful.
But sadly the survey response rate is so low as to make the numbers no more than irritating background noise. The general narrative of the US labour market for the last 15 months or so has been no hire no fire. This seems to be primarily about policy uncertainty which has caused a degree of paralysis on the part of US chief executives.
The slowdown in non-AI investment is another feature of this. There had been hopes that this paralysis would wear off in 2026. After all, few chief executives are paid to avoid taking decisions.
Unfortunately, the war and ongoing uncertainties related to trade policy seem to have kept this situation in place. Economically, the damage from this is still limited as those in work have job security, at least in the near term. While fears about AI may have a cultural impact, scepticism about its application from employees probably limits concerns about near-term job security.
That security gives US workers the confidence to scale back savings in order to meet the affordability crisis. That's all for today. Have a good day.
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