UBS On-Air: Paul Donovan Daily Audio 'Insecurity'
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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 25th of March. Reports that the US Vice President and members of the Cabinet revealed military attack plans on a public communications channel with a journalist in attendance do not directly have a market bearing. Indirectly, this news is relevant to investors.

The discussion revealed a hostility towards Europe that may be very relevant in the trade war arena. Intelligence sharing under the Five Eyes Accord, which has already been challenged, may be further called into question by the US administration's seemingly unorthodox approach to security. Weakening security ties changes the bargaining leverage around economic ties.

Finally, there are questions about the procedures and professionalism of US cabinet members in allowing this to happen. Concerns about competence in one sphere of policy may raise investor concerns about competence in other spheres of policy.

For markets, therefore, it is not the action of the security breach that matters, but the signals it sends about the way the administration conducts policy and the biases of administration members. Sadly, no economist has been unintentionally invited onto a US WhatsApp group discussing plans for US trade taxes.

US President Trump has continued their rather erratic trade policy with a series of tax pronouncements yesterday. One announcement was that from the 2nd of April, US consumers will face a 25% tax on goods from any country that has imported oil from Venezuela. The US imported just under a quarter of a million barrels per day of Venezuelan oil last year. Oil prices rose on this news.

In addition, Trump suggested US auto buyers will face higher taxes, as will users of imported pharmaceuticals, but the so-called reciprocal tariffs will have some exemptions. The erratic nature of these tax announcements should not necessarily surprise financial markets, but there are probably two points investors need to take.

The unusual move to target Venezuelan exports to third parties comes in spite of an agreement by Venezuela to accept deportees from the United States. This has to raise questions in other countries about the value of doing deals with the US administration. On the broader level, there is also the diminishing marginal returns that come from this tax policy.

The more import taxes are piled onto US consumers, the less likely it is that each new tax will get an international response. Global trade is important to the world economy. Trade with the United States is not as important as people tend to think. Countries will have to start weighing the value of trading with the United States against the cost of trade tax uncertainty and repeated tax threats against US consumers.

The data calendar is cluttered up with a host of business confidence measures, the German IFO, US consumer confidence and regional Fed business polls. It's very hard to put any reliance on the output of these reports at the moment. US new home sales data is the main release with any substance behind it. That's all for today. Have a good day.

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