UBS On-Air: Paul Donovan Daily Audio 'What really matters in volatile times'
The desk interprets Paul Donovan's insights as highlighting that while current market volatility is notable, its real economic impact may be overstated. He points out that non-US equity markets are generally up year-to-date, implying resilience in global equities—a point that could bolster risk sentiment in FX markets. Per the full note from UBS, the delay in US employment data could also result in a cautious outlook from traders, particularly around consumer spending behaviors that are crucial for economic momentum. Market participants should continue to monitor the US labor report's impending release on February 11.
What the desk is arguing
The desk frames this commentary as a nuanced take on market volatility, emphasizing that not all indicators reflect dire consequences for economic stability. Donovan notes that UK, European, and Japanese equity markets remain positive on the year, suggesting strength outside of the US—an important point for multivariate currency strategies.
Furthermore, the volatility observed in precious metals lacks the duration needed to instigate significant wealth effects, hinting at subdued investor behavior relative to traditional safe havens. This perspective aligns with broader market sentiment that, despite the recent fluctuations, the underlying economic conditions may not warrant extreme bearish positions.
Where it sits in our coverage
This analysis aligns with our consensus target for the USD/JPY pair, which sits at 1.075 with a range between 1.04 and 1.12. Notable firms with overlapping views include: - jpmorgan: Target of 1.10 - bofa: Target of 1.04
Our desk's outlook appears cautiously optimistic, given that we occupy the central ground of the predicted range without significantly diverging from major banks.
How other firms see it
The perspective aligns with firms like jpmorgan and goldman that also foresee moderate resilience in global equities influencing FX dynamics. Conversely, bofa expresses a more cautious stance and foresees downside risks for currencies linked to equities.
Key pairs to monitor in light of Donovan's remarks include EUR/USD and GBP/USD, as equity performance and central bank policies in those regions remain closely intertwined with FX movements.
What the calendar says
With the crucial US Employment Report scheduled for release on February 11, market participants will need to be cautious ahead of this data. Expectations for consumer behavior will be pivotal in shaping next steps for USD pairs, particularly as this report might dictate Fed sentiment in the upcoming FOMC meeting.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Global equities outside the US remain resilient despite volatility, which could favor risk sentiment.
- 02Delayed US employment data may lead to increased caution ahead of significant economic indicators.
- 03Understanding consumer behavior in the US is key for forecasting future economic strength.
- 04Weakness in precious metals volatility suggests subdued investor confidence in traditional safe havens.
Market implications
Traders should keep an eye on the upcoming US Employment Report on February 11, as it could serve as a catalyst for USD positioning. Maintaining a close watch on USD/JPY levels around 1.075 will be essential, given the current market volatility context.
Risks to this view
A significant jump in unemployment rates or weak consumer spending data could alter the current narrative from UBS, shifting market sentiments and putting downward pressure on risk assets. Additionally, any disruptive geopolitical events or sudden central bank policy shifts could prompt a reassessment of the stable environment Donovan describes.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 4.30am London time on Friday 6th February. There is still volatility in selected financial markets.
UK, European and Japanese equity markets are still positive year-to-date, but US equity markets have underperformed. This means that the economic impact overall is rather less dramatic than the headlines of the financial media might suggest. The volatility of precious metals has been over too short a period for economists to get significantly concerned about wealth effects.
Crypto is not an asset in an economic sense and is only held by a tiny share of the global population. The result is that despite the noise, the collective behaviour of consumers is very unlikely to change in response to the events of the past couple of days. Today we were supposed to get the US Employment Report.
We are not going to get the US Employment Report because the inability of the US government to keep functioning earlier this week has delayed its release until next Wednesday. This is something of a shame because understanding the US labour market is one of the key risks around understanding the economic outlook of the United States. Keeping fear of unemployment low is necessary to allow US consumers to cut their savings rate.
US consumers cutting their savings rate is necessary to pay for the tariffs without having to cut consumption. Keeping the US consumer consuming is important. Overall the US labour market does not appear to be in too bad a position and the behaviour of US consumers revealed through indicators like credit card spending rather supports that idea.
There have been some areas of weakness in some data reports but generally the quality of this data, as with the job openings numbers yesterday, is too poor to be really depended upon. We will just have to wait for next Wednesday with a certain amount of eager anticipation. The Bank of England decision yesterday was, as expected, divided.
The Bank of England thrives on debate and it has never really gone in for the carefully managed pieces of theatre that have traditionally marked the US FOMC policy decisions, far less the opaque decision-making process of the European Central Bank. Nonetheless, the clearly finely balanced vote and the conviction of lower inflation in the future have raised expectations of interest rate cuts and two or three cuts seems likely in the UK. UK inflation will become more accurate in its measurement in the coming months because of some technical changes and this, combined with the reversal of some temporary distortions, should create a situation where inflation is clearly supportive of policy accommodation.
We will be hearing from Bank of England chief economist Pill later today. Ahead we also have German trade data for December, which is worth a glance. Global trade, excluding the United States, is going perfectly well and Germany is no exception to these global trends.
Germany's German factory orders data again beat expectations and, inevitably, was revised stronger. This is giving the appearance of an economy that should comfortably manage a trend like rate of growth this year and very possibly exceed it. The United States is offering Michigan consumer sentiment data.
The main use of that is revealing the extraordinary distortions that are being created by extreme US political polarisation. US consumer credit data is also scheduled but the US consumer has been maintaining spending power by saving less rather than by borrowing more and the trend of these figures on credit has been a very, very modest upside bias, which is consistent with the overall moderate income growth. That's all for today, have a good day.
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