Tariffs, de-dollarization, and gold: Navigating market volatility
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Hi everyone and welcome to CIO Live for this week. My name is Wayne Gordon. I head research and investment advisory in APAC. Thank you so much for joining us today. We have a pretty all-star cast actually for the discussion today where we focus on the very pressing geopolitical risks as they come to hand.

in the Middle East, as well as the fact that during this period, tariffs and US taxes have very much gone into the background. And that will become a pretty present thought as we go towards July 9. And

Of course, we look at how this has impacted some key asset classes such as the US dollar as well as gold. So today I'm actually just before I start that, I'd like to firstly, for those of us who are listening, if you have a question, please look down into your screen. There's a box.

On the right-hand side, if you would like to enter a question there, we will definitely endeavour to get to those questions towards the end of the session. Now, look, just to introduce our team today, we clearly have a geographically diverse

group of CIO specialists. We firstly thank Giovanni Stonovo, who is our head of energy analysis and looks very closely at Middle Eastern geopolitics. He's doing dairy farming hours today. He's woken up at around 3.30 in the morning to join us. So thank you, Giovanni. We have Kurt Reinman here. Now, Kurt runs our fixed income and also looks after geopolitics.

and politics more generally in the US. So thank you very much, Kurt, for joining us. I'm very late in the US time. So we really appreciate that. And then, of course, a face that we all know very, very well here in Asia, Tech Lang Tan, who looks after Asia FX. So thank you, Tech, for joining us this morning. Look, Giovanni, I'm going to start with you because the news overnight says

There's continued developments on the current conflict between Iran and Israel. Of course, we saw on the weekend the US stepping into this conflict. Just from the, I suppose, the start, where do you see we are at right now and your sort of expectations of how things can develop going forward?

Thanks Wayne. Definitely quite intense last 48-60 hours with the US first bombing the nuclear facilities in Iran. Then we had yesterday Iran's response which I would call very muted and apparently very well telegraphed towards Qatar but at the same time also towards the US and

overnight different posts by President Trump on his social platform indicating even that there has been an agreement of a ceasefire between Israel and Iran.

Time will tell later today if the fire stops. As far as I've seen on social media this morning, the fires have completely stopped in Tehran at the time. It's quite quiet there. So essentially everyone now believes the conflict is sorted. In my view, there is one element which is still not sorted out.

the element which caused these intense last 72 hours or last two weeks, the nuclear program of Iran. There has been yesterday in the parliament in Tehran discussion about

banning the International Atomic Energy Agency to go into the country and review how the nuclear program is evolving. There is a lot of uncertainty what happened with the enriched uranium in Iran. And these are elements which need to be sorted out over the coming days to have a lasting peace deal. And at the moment, the market is mostly in a risk-off

risk on environment, everything is fine, the worst is over. You can see also the reaction on oil prices, there has been no disruptions. Oil prices have fallen by $10 yesterday, this morning slightly even more. So for now, things have calmed down, time will tell if that's the end of the conflict or we probably have again some tensions piking up over the coming months. We'll step back to you, Will.

and just to just to stay with you for a minute actually you know this is you know this is terrific news that we're starting to see uh some de-escalation and cooler heads are prevailing um and some political solutions are uh coming to the fore um just giovanni you know maybe you can just outline to us

where the key risks are in particular for the oil market if things were to spark up again or things were to deteriorate further from here. So Iran is the fifth largest oil producer globally, 4.7 million barrels per day of oil production, around 4% of global oil production.

So significant player. But the biggest concern when it comes to oil markets relates to the region. There are neighboring states, Saudi Arabia with production at 9.5 million barrels per day, on the crude side, UAE with 3.5 million barrels per day, Iraq, also quite a large producer in the region. And most of that oil needs to go through this narrow strait of Hormuz and generate the uncertainty relates to

Is there a disruption of these flows? Historically, we have always seen Iran threatening to close the strait, but only once managed to stop flows by putting mines. It never really stopped the flows completely.

two years ago, excuse me, 2019 playbook was attacking infrastructure in the neighboring state. I regard that as the biggest risk if there is again an escalation. But what has also changed over the last six years is essentially that Iran is working more closely with the neighboring states, helped also by China brokering that deal and essentially

This is an element that can happen if he runs exports 4 to 0. Otherwise, probably less likely to happen.

Okay, that's great insight and thank you very much for that. We might just cross over, if you can stay with us Giovanni, we might just cross over to Kurt who's sitting there in the US. While I don't want to focus specifically on this geopolitical situation externally of the US, Kurt, maybe we can just start by, you know, what you're hearing on the ground and

with respect to this de-escalation and what's being said in the US press around the actions that the US have taken over the most recent few days?

Yeah, so the initial reaction is one of, I would say, relief that the U.S. was able to commit to this mission and achieve what seems to be at least a partial, if not a full, you know, objective, which is the destruction of a considerable amount of Iran's nuclear capabilities without

With the element of surprise and without losing any service people, that was part of the mission. And it seems also that the president has committed the U.S. to a limited involvement here, which would have been if it had dragged on, if the U.S. had been pulled into this. And of course,

We can't rule that out down the road. But at least at this point, judging from the events of the last 48 hours, the reaction within the halls of Congress among Republicans has been generally supportive.

Those Republicans that are officially and quite self-declared isolationists are not in favor of this move. There's a large segment within the MAGA party that would prefer that the U.S. focus on its own concerns and not get involved in foreign conflicts. But because this was a limited incursion,

And it seems that the scope and scale will remain so. So far, the reaction has been one of supporting the president in this decision. Could have gone a different way. But the events so far have not, within the Republican Party, have not seen any significant fractures. Yeah, that's excellent. So I guess, you know, the obvious elephant in the room is still

tax, tariffs, July 9th is around the corner. You know, this has been a, I wouldn't say it's, you know, I don't want to describe it as somewhat of a distraction to that debate, but nonetheless, it has diverted attention from, you know, these very pressing issues on trade, et cetera. As markets begin to focus back on that key date,

How do you see the policy narrative evolving into July 9th? And is it indeed possible that we'll get further sort of temporarily delays to what would otherwise be a pretty sharp snapback in some of these reciprocal tariffs?

Yeah, the Treasury Secretary Scott Besant has been out publicly talking about the prospect for some extensions in the deadline. He wouldn't be making these statements if it wasn't widely agreed within the administration. Remember that also the reciprocal tariff deadline is July 9th for most countries, but for China it's mid-August.

we should expect that in some cases the reciprocal tariffs will come back on. It's hard to know where because we're not party to these bilateral negotiations, but because the negotiations themselves

and the deals that are formed are not binding, it gives quite a bit of scope for countries to negotiate deals with the US. You think about just even purchase commitments, buy more agricultural products. The recent news is we hear about NATO increasing its spending on defense to 5% of GDP for military equipment and infrastructure.

That goes a long way to serving some of the president's initial grievances. Where I think we should probably be focused a bit more, though, is not on these reciprocal tariffs. The deadlines are looming. It's something that caused quite a bit of market unease back in April. But it's more of these product tariffs, which the administration has announced they're going through a typical technocratic process for getting those approved. Those are going to be announced tomorrow.

Pretty soon, I would expect July, August timeframe on products ranging from semiconductors to pharmaceuticals. These could come on. They could also be negotiating tactics for the administration to maintain a 10% baseline tariff across the board. And in some cases where countries aren't playing by the administration's rules, they might not allow for quotas or other exemptions to these product tariffs.

One thing I would say though, and there's a lot of concern that maybe tariff rates will go back to what we saw in April. And if the goal of the administration is in any way to raise revenue from these, then it's quite important that the tariff rate, which is already six times what it was at the beginning of 2024, doesn't go too high and destroy the import activity and the economic activity on which these are based.

So if we go to a 25% tariff rate and we have an effective embargo with a number of countries, that's just going to impoverish the tariff revenue. It's going to make that come to a screeching halt as countries just stop trading. A 15% level, which is about where we are now, is one where the U.S. could raise upwards of $400, $300 billion a year.

per year and that revenue is quite needed. As you mentioned before, we've got this bill working its way through Congress and it's doing very little to get the U.S. back on a sustainable fiscal footing.

Look, it's really good that you've raised the fiscal situation because, you know, overnight we heard from a couple of Fed members, which I'll get to a little bit later with you and Tech together as we think about how this impacts on the US dollar. But at the moment, the fiscal position, while we know that the US is

it's been on an unsustainable path for quite some time. In fact, we haven't seen a surplus, I think, since the Clinton administration. When we think about...

the reasons why the market are getting increasingly worried about this to the point where we've seen a backup in 30 year yields. We've seen some dysfunction of the US Treasury market at various points in time. Why in particular are investors now

highly focused on this? Is it because of the uncertainties around trade as well, disrupting the order? Or where do you see that those reasons for why people are so focused right now? Yeah, higher tariff revenue, if it doesn't hurt the economy, can on the margin help the fiscal situation. So I'm not sure that that's causing the unease necessarily in the bond market and also the inflation that it causes.

could very well just be temporary. It's the equivalent of a tax increase. What I think the market's concerned about is that right now, interest costs as a share of overall government spending and even as an outright number is higher than defense spending.

That's concerning because we haven't even cycled through all of the debt that was issued years ago at substantially lower interest rates. So those are going to start to mature and then they're going to be issued at higher rates and those rates are now upwards of 4%. So the cost of servicing the debt is going up and the bill that's working its way through Congress is

It does one important thing on the macro side. It prevents a sharp increase in tax rates for Americans. Okay, so that's actually helpful in a way to the global growth picture.

But it doesn't repair the fiscal situation at all. In fact, it increases deficits in the near term because there are additional tax cuts for things like TIP income or Social Security payments if people are receiving retirement benefits from the government.

These are increasing the deficit because the cuts don't appear until later. Cuts to social programs or reforms to the Inflation Reduction Act, those don't appear until later. So you a little bit get your dessert before you have to eat your broccoli is how I think about it. And so this sustained higher budget deficit as a share of GDP because of the

the bill is I think putting some upward pressure on term premium. It's making longer maturities underperform. Our advice this year has been to largely stay away from, if you can avoid it, the back end of the yield curve in the US because you can get 90 to 95% of the yield in the intermediate part of the yield curve without having to take on undue interest rate risk. So

But these are current fiscal concerns that don't necessarily mean a hemorrhaging in the bond market. It's just something that I think investors need to be mindful of because if you do get some higher inflation or if the Fed can't cut interest rates or if growth surprises to the upside, any of those factors could be some pressure on the long end of the yield curve.

Yeah, that's a really great spot to have a bit of a segue into, you know, some of the impacts that we're seeing flow through into the dollar. You know, clearly, the US dollar is usually aligned with many other safe haven assets.

where when you get these periods of geopolitical uncertainty or indeed economic uncertainty, irrespective of what's happening in the US, you often find the dollar is on a stronger footing. This time round, it's not quite played out that way. And I just, before I move to tech, I just want to stay with you quickly, just with respect to the long end of the yield curve that you discussed and some of the liquidity issues,

And this does relate to the dollar. Are we seeing, I suppose, how would we say it, an uncertainty on the US government as a partner? Are we seeing uncertainty around Fed independence, for example, being challenged? Are these things also having an impact on the fixed income market? And then as we move to tech on the dollar?

I think it's really more just competition for yield elsewhere that wasn't there before. So you're seeing, you know, yields rising globally, partly related to what we were talking about before on defense spending and the kind of growth outlook seeming to improve in a number of places, inflation taking hold in countries like Japan. These are the factors that are probably, in my mind, putting more pressure on the idea of, of, of,

of investors maybe diversifying their fixed income holdings. We've seen that

There's, I think, also the shift in this idea of US exceptionalism, which I don't think that that idea is, if you will, over, but there was maybe kind of too much enthusiasm about the US coming into the start of the year. Investors globally relying for returns primarily on their exposure to US markets.

That has shifted some, but I don't think that that's a sign that the US exceptionalism theme has run its course. It just may have gone a little bit too far.

Yeah, that's a really good segue actually into talking about the dollar and now tech. You know, we clearly have seen, as I said, the dollar not behaving as expected. What's your sort of views on the dollar going forward? And obviously, increasingly, as Curtis pointed out,

people are looking to diversify their asset base, not so much from the US, but when they're putting more cash to work, they're wanting to put it to work in other regions and other asset classes than just equities. What are you seeing from the dollar perspective and how those trends playing up?

Yeah, so I think one of the more important characteristics that is disappointing the markets right now, especially for Asian investors that are holding on to a lot of dollar exposure, is that the safe haven quality seems to be lacking significantly.

performance this year. So if you think, for example, during Liberation Day, 2nd of April, where there was a big decline in the global stock market, but the dollar declined at the same time, I think that truly came as a behavioral shock to how the dollar behaves in a typical risk of

situation. So as far as investors' portfolios are concerned, they are missing this natural hedge that if they were to hold on to the dollar, it should actually strengthen during risk-off. And I think just to strengthen the message why this time round the dollar is not able to perform as a safe haven, I think that there is a long list of policy uncertainty.

The first is with regards to trade policy uncertainty. As we know, if the US is going to take the trade tariff too far against the rest of the world, it actually hurts the US more than it hurts the rest of the world. So that is the first angle. The second angle is really about

the tax policy, where if you think in terms of what is a growing discussion in the form of Section 899, which is within the one big beautiful bill that is moving along the passage of the Congress right now, I think there is a realization that even though there is recently a watering down of potentially imposing higher taxes

on holders of US Treasuries. But I think the fear remains that this government or this administration is actually open to the idea that they are willing to raise revenue, not just domestically, but also for foreign holders of US assets. So that is a bit of a tax policy uncertainty. And if you look at FX policy uncertainty, I think it is

no secret that the Trump administration is actually unhappy with the undervaluation of certain currencies, particularly in Asia, that they are actually seeking stronger Asian currencies vis-a-vis the US dollar. So again, that is impairing the safe haven of the US dollar. You talk about Fed independence win. I think that is also coming into focus

monetary policy uncertainty. So I think with a long list of policy uncertainty out of the US administration currently, it is difficult to imagine that we will see the dollar functioning properly as a safe haven. And I think that brings us to the point that if you are overexposed to the US dollar in your portfolios, you should actually be looking for diversification opportunities to the likes of the Australian dollar and gold.

And perhaps this is a good point to circle back to you, Wayne. Specifically on gold, I think it has actually delivered very robust returns over the past 24 months. Do you think this is still a good trade? And how do you see investors that are holding on to gold or even not holding gold? What should they do in terms of their portfolio management?

Yeah, look, that's a really good question, Tech. And it sort of puts me in the non-questioning spotlight, actually. But so for gold itself, it's very clear what the trends are. And the trends are being shown to us by global central banks who have been buying gold now in large amounts,

In fact, amounts that we haven't seen since the mid 60s over the last couple of years. What triggered that? Fundamentally, it was the beginning of the Ukraine war and the fact that the US sanctioned the Russian central bank. Now, that sent waves of concern around.

across many central banks across the world of their US dollar denominated assets

sitting abroad. And so gold has served that function for central banks as a diversifier over the last couple of years. And those central banks have continued to drive, to buy gold at these very high amounts of over 1,000 tonnes annually. And we actually think that that will continue. And the trends are that we're seeing on the trading side that that is indeed continuing.

Now, as you pointed out, as we try to diversify from the US dollar, gold is actually very negatively correlated with the US dollar itself. So a weaker US dollar tends to lead to a stronger gold price. And it provides that diversification benefit not just against the dollar itself, but also against any pending stresses that might occur in equity markets or in bond markets.

And if indeed in the end we go into a period of financial repression light, so to speak. And in that context, gold this year has been one of the standout assets.

where people have not been allocated to gold investors private investors have been under allocated to gold as well as that surge in demand from central banks which has in fact led gold to outperform almost other or all other asset classes where is it going from here well look the runway to our base case of 3500 is certainly less than it was at the beginning of the year

Having said that, we see gold as more of a longer term diversification asset where people who have an affinity to gold

can be holding around the 5% allocation to gold, and that will provide benefits to their portfolio more generally by also reducing the broader volatility of that portfolio while helping them manage their dollar risk. So I think it's one of those sort of hedges with benefits where we do expect that

that prices can rise further from here. And it certainly has that for those who have an affinity with gold has that position in their advisory portfolios. But just to circle back quickly to Giovanni and I want to talk quickly about where would we invest at this point? Giovanni, what's your view on oil here? And how would you be managing investments in oil given the current developments?

So at the moment we have a forecast of $68 a barrel, so not far away where the price was. I would have been a bit more cautious in recent days when the price was closer to $80 just out of the fact that there was still a lot of uncertainty. Generally, investors should be mindful that oil has an elevated volatility of

lately 40, 50, even 70%. So you need to have a high risk appetite, but also that high volatility now that the price has come down might offer some new opportunities in looking into the option market and new possibilities. And here clearly you need to check with your client advisor the possibilities. Alternatively, also natural gas could be a market of interest, particularly the next year side.

Yeah, OK. Thanks, Giovanni. And that's really good insights there. Just coming back to you, Kurt, in this sort of rapid fire sort of round we're doing here. When it comes to the investment side, I know you mentioned that people should...

the long end of the US curve if they can. But where do you see the opportunities in fixed income in the US today? And

the avoidance of the long end of the U.S. curve, does that in your sort of broader view, and this might be stretching the friendship a little bit, does that in your broader view, is that what you would say for currencies outside of the U.S. as well? So, you know, rates markets outside the U.S.? Right. So the, you know, the first part of the question, you know, yeah, I guess I would say that the, you know,

The rates market is one of those times when I would say that we have to be mindful of... Actually, Wayne, say the first part of the question one more time. Sorry. So you talked about where you would not invest in the rates curve, so you would avoid the US curve. Yeah, I would focus on... Where would you look for the curve? Right now, I'd focus on quality...

I would stay with an up in quality bias. I think about the rates that we're getting today with this volatility that we've all been talking about, whether it's the Middle East or tariffs or tax policy concerns about where U.S. tax policy might go with respect to foreign investors. I mean, this is creating a lot of unease. Volatility has perked up at various times over the course of the year.

So, you know, we don't want to go, you know, over our ski tips or get too far down the risk spectrum to go too far down the capital stack. I want to stay, you know, kind of a comfortable, higher quality fixed income investment grade corporate bonds, you know, U.S. dollar based. We're talking about, you know, over 5 percent yield.

The last time we had the Trump administration raising tariffs or episodes of this kind of volatility, we weren't getting this kind of ballast within fixed income. So I think that's a real kind of gift, if you will, or something within the portfolio that we should make sure that we're optimizing and maximizing.

As far as going out the yield curve in other countries, I think it comes back to when we're investing locally, we have to think about what is the fiscal picture? What is the inflation outlook in every country these days? That could be slightly different because as I said, Japan, which hadn't had inflation for a long time, is now experiencing a bout of inflation. Germany and the rest of Europe, which hadn't been large spenders on military, are now doing so.

Each country is facing its own set of inflation and sort of budget deficit challenges out the long end. The compensation for that, of course, is going to be different. So I would just say that today, yeah, we have to be more mindful of longer duration because inflation risks generally are with us and

You know, in a way that we, you know, maybe coming into the pandemic, we didn't have as many concerns because we were in an era of abundance. I think the kind of scarcities that we're seeing today in the labor market, you know, related to climate change, related to demographics. These are all, you know, issues that we need to think about and they play out in that long end of the yield curve.

that's fantastic and that actually uh answers a couple of our listeners questions as well um i just want to turn to you tech um when we talk about uh the us dollar and diversification from the dollar um what what's the steps that you think that people can take as they look to diversify into other markets and other segments

Yeah, so I think first to clarify because right now the most popular buzzword in the markets is really de-dollarization. You see that really on a daily basis but when it comes to de-dollarization and what it means, I think first and foremost the term has been a little bit too loosely used in the sense that if you think about for the past 10 to 20 years, de-dollarization really

serves to mean that the reducing of the US dollar as a form of international trade payments, as a form of trade finance, as a form of storage of global FX reserves. That actually is the traditional meaning of de-dollarization. But I think more recently, when the dollar started to weaken, the market

kind of broaden out the interpretation as hedging dollar in a dollar weakening cycle. So I think just to be very clear that de-dollarization is more referring to a view that the dollar is likely to weaken and how you should manage dollar weakness

as opposed to decreasing or moving away from US dollar assets. So if we were to take it to the portfolio context, for example, clients that is holding on to US dollar assets, I think the first confusion when they hear the market saying de-dollarization is that I should sell my US dollar asset. That is actually not true, especially with regards to how we

think US dollar itself should perform because we do think there is good upside potential in the S&P if you were to take our June 2026 target of 6400. We also like quality as Kurt has mentioned in a bond space

As long as you avoid overexposure to the US long-end bond yields, you should actually still stick to the US investment grade and high grade. So I think, again, it is not really about trying to make big portfolio shifts out of US assets. It is more to hedge.

US dollar exposure. And I think pertinently the question is if you are able to do hedging, whether it is in a hedge share class or whether it is a currency overlay approach, we can actually be quite easily done. That is the most direct form. Otherwise, really it is to diversify funds into other non-US dollar assets to the likes of

currencies like the Australian dollar, sterling, pound, but you are getting actually a very high risk-free rate. And if you were to invest in a credit space, pound and Aussie fixed income space do actually provide a very good yield. And last but not least, I think gold is just from a portfolio context, as you mentioned, when it makes a lot of sense as a portfolio insurance and also to ride on dollar weakness because gold does benefit quite directly from dollar weakness.

Yeah, that's really good insights and advice, Tech. Thank you very much. And look, we're completely out of time today. It's been tremendous to have a geographically diverse panel on today from all time zones in CIO. So I first want to particularly thank Giovanni for joining us.

so early in the morning there thank you Giovanni for those up-to-the-minute insights on the Middle East situation. Kurt as always for those people who want to want to see more of you hear more of you go to your music streaming platform near you and enjoy some of your wonderful piano playing etc so thank you Kurt for your insights

And again, you know, I sit next to Tech every day. So Tech has to listen to me pretty frequently and I have to, I get to listen to his great insights on a regular basis. So thank you as well, Tech. Really appreciate that. From us here at CIO, it's been a little bit longer today, but we had such a breadth of information. Thank you so much. Look forward to catching up with you next time. And if you have any questions, please reach out to your UBS representative,

And the questions we have received from the listeners today, viewers today that we haven't managed to get to, we will definitely pick these questions up in publications that we do over the next week or so. So thank you, everyone, and catch up with you next time.

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