UBS: Client risk appetite has recovered somewhat, but oil prices, central banks, and political risk still limit large directional positioning

Overview

This is a UBS global strategy client-views report based on conversations in the first half of May with hedge funds, real-money accounts, and bank treasury clients. The report centers on oil prices and geopolitical shocks, Fed and ECB pricing, relative value in European government bonds, the UK rates curve, and major open rates trades. The overall tone is cautious: risk-taking has improved versus April, but investors are still unwilling to build large directional positions.

Core views

Core views include: First, energy prices and supply-chain disruptions remain the main tail risks on investors' radar, potentially depressing Q2 risk sentiment and prompting some investors to reduce EM and equity exposure; second, US CPI has reinforced hawkish rates trades, but there is no consensus on curve shape; third, ECB hike expectations still exist, but clients have less confidence in further hikes and prefer to position for easing further out the curve; fourth, in European government bonds, carry demand has recovered, and UBS does not favor contrarian bets that spreads will continue to tighten; fifth, in the UK, higher yields are attracting buying, but fiscal, political, and changing investor-base dynamics keep gilt volatility risk elevated.

Analysis framework

The report combines client interviews, macro data interpretation, central-bank pricing stress tests, and relative-value trade reviews. The main text first summarizes client risk appetite and views on oil, then discusses the US, the ECB, European government bonds, the UK, and other markets in turn, and finally lists UBS's open rates trades and risk disclosures.

Methodology notes

• Client views researchClient meeting feedback

  Distilling market positioning and risk appetite through conversations with hedge funds, real-money accounts, and bank treasury clients.

  This method reflects current institutional investor focus and positioning bias, but it is not a statistical market-wide survey.

• Macro rates strategyCentral-bank pricing and yield-curve analysis

  Identifying rates-trading opportunities around CPI, PMI, wage pressure, policy-meeting pricing, and yield-curve shape.

  The report focuses on comparing policy paths, inflation pressure, and curve structure across the US, the euro area, and the UK.

• Relative valueEuropean government-bond spread analysis

  Comparing the spreads, carry, and fiscal risk of Italian, French, and Spanish bonds versus German bunds.

  UBS thinks Italy may underperform France over the medium term, but near-term carry demand recovery leaves little case for shorting Italy versus France.

• Risk disclosureMulti-asset valuation and risk disclosure

  Multi-asset investing faces market risk, credit risk, rates risk, FX risk, correlation shifts, geopolitical shocks, and policy shocks.

  The report discloses that valuation methods may include DCF, SOTP, and multiples analysis, but this piece is mainly a strategy view rather than a single-security valuation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Crude oil and energy-related assets

  Core macro risk variable

  Strengths

  Falling global inventories and supply-chain disruption risks may support an oil risk premium.

  Weaknesses

  The realized oil-price range has been less extreme than the market previously feared, so near-term volatility may not keep expanding.

  Comparison

  Compared with equities and EM assets, oil is the upstream variable affecting Q2 risk sentiment.

  Risks

  Geopolitical conflict, supply interruptions, inflation pass-through, and policy response uncertainty.

• US rates and US Treasuries

  Hawkish inflation data reinforces front-end and duration-short trades

  Strengths

  Recent CPI supports higher rates, and some clients expect US rates to keep rising.

  Weaknesses

  There is no consistent view on curve shape; some real-money and treasury clients think 4.50% on the 10-year is attractive.

  Comparison

  Compared with Europe, the market is more focused on US inflation resilience and the Fed's reaction function.

  Risks

  A reversal in inflation data, changes in the energy shock, FOMC communication, and curve-shape uncertainty.

• Euro area rates and Euribor

  ECB pricing-dislocation trade

  Strengths

  Muted wage pressure and growth concerns make a more dovish trade attractive.

  Weaknesses

  The market still prices some chance of hikes, and near-term policy communication could bring volatility.

  Comparison

  Compared with the US, growth concerns in the euro area are more pronounced, and clients prefer an easing-price structure further out the curve.

  Risks

  A renewed rise in inflation, hawkish ECB guidance, and repricing of the June or July meetings.

• European government bonds

  Carry and relative-value trade

  Strengths

  Renewed demand from moderate carry seekers supports further spread tightening.

  Weaknesses

  Italy may underperform France over the medium term, and fiscal-rule and political factors still need monitoring.

  Comparison

  UBS remains neutral on Italy, France, and Spain versus Germany, and does not favor fighting spread tightening.

  Risks

  Fiscal support limits, EU rule reviews, political events, and the ECB's stance on fiscal measures.

• UK gilts and the GBP rates curve

  High yields are attracting some demand, and curve steepening is the main trade direction

  Strengths

  Demand is starting to emerge at high yield levels, and UBS holds a 5s10s steepener trade.

  Weaknesses

  Long positions initiated before and after the election have performed poorly, and investors worry about changes in demand structure and fiscal risks.

  Comparison

  Compared with the US and the euro area, the UK is more influenced by local fiscal, political, and overseas price-sensitive demand.

  Risks

  A shift in the gilt investor base toward price-sensitive overseas money, fiscal risks, political uncertainty, and an oil-price shock.

Key data

• Client risk appetiteLimited demand for large directional positions, but risk-taking has improved since AprilBased on feedback from client meetings in the first half of May.
• US 10-year yield base case4.50%UBS Q2 base case; if the energy disturbance lasts longer, it could reach 4.75%.
• ECB 2026 hike expectations50-75 bpsStill the central expectation, but client sentiment has turned more dovish than before.
• June ECB meeting pricingabout 20 bps of hikes priced inAt the time of writing, the market was pricing in about 20 bps for the June meeting.
• July ECB pricingabout 16 bps of hikes priced inUBS began taking the July ECB leg when hikes were priced at 19 bps.
• 10-year Italy versus France yieldItaly about 11 bps higherNear zero in Q4 2025, and had risen to 22 bps in March 2026.
• UK 5s10s steepener tradeEntry 45 bps, target 65 bps, stop-loss 30 bpsUBS initiated this trade earlier this week.
• Open trade highlightsSEK vs USD +25 bps, JPY 6m fwd 2s10s +21 bps, EUR Euribor relative trade +11 bpsFrom the open UBS rates trade table.
• Open trade pressure pointsAUD 5y2y -25 bps, NZD RBNZ/1y1y -19 bps, CHF SARON -13 bpsFrom the open UBS rates trade table.

Impact & implications

For investors, the implication is that macro trading remains in a high-uncertainty environment: energy and geopolitical risks could lift inflation and rates, weighing on equities and EM risk appetite; but actual oil-price volatility has been less extreme than feared, which also leaves room for selective risk-taking. The second half of the year may become an important window for trading central-bank pricing, because the market will get a clearer read on how policymakers judge the nature of the current supply shock.

Risks

• Geopolitical risk remains unresolved, and energy price tightness could persist.
• Global oil inventories are falling, and supply-chain disruption may be underestimated by the market.
• Another hot US inflation reading could push rates higher and weigh on risk assets.
• Uncertainty over how central banks judge the nature of the supply shock could cause policy paths and market pricing to swing back and forth.
• European fiscal rules, the German budget, and coalition politics could affect European government-bond spreads.
• Changes in the gilt investor base could amplify yield volatility.
• Multi-asset investing faces market risk, credit risk, rates risk, FX risk, liquidity risk, and correlation-shift risk.

What to watch

• Whether subsequent US CPI releases and broader inflation pressures continue to validate a hawkish rates stance.
• How the Fed chair and the FOMC respond to hotter inflation readings and the energy shock.
• Whether pricing for the June and July ECB meetings eases or heats back up.
• Whether euro-area PMI, wage pressure, and growth concerns continue to support dovish pricing.
• Whether spreads between Italian, French, and Spanish bonds versus German bunds keep tightening on carry demand.
• Changes in UK fiscal policy, local politics, and overseas investor demand for gilts.
• Whether realized oil-price volatility, global inventories, and supply-chain disruptions worsen.
• German 2027-2028 budget plans and coalition politics.