Near term, the rise in oil and gas prices are not yet economically threatening (they would need to stay high for longer). Dollar strength may be less about safety, and must partly reflect the need to buy more dollars to pay for oil, gas, or gold.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management.
It's 7 o'clock in the morning, London time, on Tuesday the 3rd of March.
The war on the Gulf has produced generally predictable short-term responses.
Oil and following attacks on Qatar, gas prices have risen.
This is not yet something that is particularly economically threatening.
The dollar has strengthened modestly. It seems difficult to characterize this as a safe haven flow,
especially given the failure of treasuries to strengthen.
But if oil and gas and indeed gold are attracting inflows and or are higher in price,
more dollars must be purchased to buy those commodities.
Overall markets seem to be reacting in a rational way,
not looking for the war in the Gulf to detract from the underlying economic growth story.
For the long term, beyond the immediate focus of the financial markets,
there are some more interesting considerations.
This is less about the outcome of the war.
Investors remain confused about the long-term aims of the United States,
and indeed there is a coherent long-term aim.
The US administration has given conflicting signals,
and US President Trump's White House comments have offered no real clarity to financial markets.
However, there are at least four longer-term considerations that are already emerging.
The first is a reinforcement of the changing nature of war,
a lesson already being learned in the Russia Ukraine fighting.
Drones have hit the US Embassy in Saudi Arabia,
and relatively cheap military technology combined with the amplification and sensationalism of social media
is producing results in terms of popular sentiment at the very least.
Second, this is going to be costly for the US over time.
There will be more pressures on fiscal policy,
and weapons stockpiles will need to be replenished,
and it's becoming clear that certain military procurement may very well need to be expanded.
This may have contributed to the relatively poor performance of US government bonds.
Third, this does change things in the Gulf region.
Economies that were seeking to diversify away from energy now face additional hurdles.
A bad cycle of TikTok videos can undo months of conventional advertising when it comes to tourism.
Expatriates, especially those moving for tax reasons, often have a herd mentality.
Initially, as they move abroad, this can manifest in a desire for reassurance
that they're not alone and everyone else will be following their move.
In reverse, this herd mentality could also lead to a more rapid emigration,
and people who have already moved once are more inclined to move again.
Related to this, however, is the fourth long-term consequence, taxation.
Already, questions are being asked about why people who are in effect tax exiles
should be able to draw on domestic taxpayer funding to which they have not contributed in order to be evacuated.
Over the longer term, this may lead to questions about the nature of taxation and indeed citizenship
and the possibility of global taxation of citizens, etc.
Data is not grabbing the headlines but should get attention.
As for the near term, the economies will eventually exert their influence over geopolitical noise.
The UK's BRC shop price index or unchanged prices on the month leading to a decline in the year-on-year rate.
Aside from potential energy price issues, UK inflation seems set to decline quite quickly,
and underlying inflation pressures seem to be contained.
There are preliminary February inflation figures from Italy and from the Euro area, again,
seem to be benign overall.
That's all for today. Have a good day.
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