UBS On-Air: Paul Donovan Daily Audio 'Where to start?'
The desk is focusing on the implications of recent shifts in U.S.-China trade rhetoric, particularly following President Trump's tentative steps towards a conciliatory approach after initial threats of new tariffs. Per the full note source, strong trade data from China suggests a nuanced reaction from export dynamics, potentially benefitting U.S. businesses. This development, compounded by an increasingly unpredictable U.S. policy landscape, might influence trader sentiment in the near term and challenge recovery prospects. Given that U.S. economic conditions remain in flux, it will be crucial to monitor how financial markets respond, especially in light of ongoing negotiations.
What the desk is arguing
The desk argues that the recent tariff threats, followed by conciliatory remarks from key U.S. figures, indicate a potential pivot in U.S.-China trade relations. This reflects an acknowledgment of market sensitivities that could impact positioning across risk assets, as highlighted by Paul Donovan from UBS in his recent commentary.
Supporting this argument, September trade data from China showed stronger-than-expected exports, particularly to the U.S., suggesting Chinese exporters are strategically maneuvering to maintain sales despite tariff pressures. The unusual trend wherein exports to the U.S. outpace imports highlights efforts by Chinese firms to adapt their supply chains to minimize tariff impacts.
The alternative read would be that financial markets have reacted too quickly to the initial rhetoric and that real economic factors could still lead to significant trade disruptions should policy uncertainty persist, possibly constraining corporate growth and investment.
Where it sits in our coverage
Our current consensus target for EUR/USD is set at 1.075, with a range of 1.04 to 1.12, reflecting a careful balance of risk-off and risk-on sentiment.
This view is closely aligned with jpmorgan, which targets 1.10 for March 2026, while diverging from bofa, which anticipates a more conservative target of 1.04 for the same tenor. The desk's positioning suggests cautious optimism, placed near the upper boundary of the consensus range, awaiting clearer signals from upcoming policy shifts.
How other firms see it
Aligning with our narrative, firms like jpmorgan reflect a positive outlook towards U.S.-China trade relations in their forecasts, but bofa holds a more conservative view, indicative of possible downside risks associated with persistent uncertainties.
Given the dynamic nature of trade negotiations, key pairs such as USD/CNH may also reflect shifts in market sentiment, while the impact of U.S. policy decisions remains paramount in shaping future expectations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S.-China trade tensions remain fluid, with recent conciliatory signals possibly altering market outlooks.
- 02Stronger-than-expected Chinese export data indicates strategic adjustments to circumvent tariffs.
- 03Uncertainty in U.S. policy could pose risks to corporate investment and broader economic recovery.
- 04Positioning in risk assets should be closely monitored amid evolving trade dynamics.
Market implications
Traders should watch for breakouts around the 1.075 mark in EUR/USD, along with closely related USD/CNH behavior, as indicators of sentiment related to U.S.-China negotiations. Peak volatility may emerge as markets react to any new trade developments.
Risks to this view
Should President Trump's administration revert to aggressive trade measures or if U.S. economic indicators worsen, it could exacerbate market uncertainty and lead to a rapid reversal of the current bullish sentiment in risk markets.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Monday the 13th of October. There has been something of a flurry of noise over the weekend in the wake of US President Trump's Friday threat to impose further aggressive tariffs on US consumers of product from China.
Both Trump and US Vice President Barnes have made conciliatory noises, which suggests that there may be some kind of retreat from the original threat. Risk markets, which had suffered significantly on Friday, have shown signs of recovering. Meanwhile, China's trade data for September showed stronger-than-expected exports and imports.
There was an increase in exports to the United States in dollar terms. While the US is obviously not able to publish data at the moment, the trend recently has the two countries' data showing China selling the United States more than the United States was buying from China. That anomaly hints very strongly at rerouting by China to enable US importers to avoid some of the tariffs.
This may also help to explain why tariff revenue collected in the States seems to be lower than it should be. What does this episode tell investors? The main risk may not be the tariff effect so much as the unpredictability of US policy.
One of the hopes for some kind of growth recovery in 2026 is that uncertainty will diminish and US businesses will be able to adapt to the level of uncertainty that does persist. It's not just about trade policy. The US does seem to be firing federal government workers, which adds uncertainty around the strength of the bounce-back from the current government shutdown, for instance.
If uncertainty is not contained, it might act as a constraint on some corporate activity. However, it does appear, once again, as if a negative financial market response will change at least the tone of US policy. To have both Trump and Vance commenting over the weekend is an unusual degree of focus.
Meanwhile in France, President Macron has appointed a new cabinet. Last week's Prime Minister, Le Corneau, has been reappointed as this week's Prime Minister. A budget proposal is expected on Tuesday.
At this stage, the markets seem inclined to shrug their shoulders with indifference to the day-to-day drama of French politics. A risk premium has been priced into French government bonds and is very likely to stay there for the time being. Japanese politics has also provided markets with some volatility as the governing coalition has collapsed and the junior partner, Komeito, is refusing talks with the Liberal Democrat Party.
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