15 Mar 2016
Global macro risks: After a growth rally, rate risks may be looming – Goldman Sachs
Noah Weisberger, Research Analyst at Goldman Sachs, notes that the markets continue to recover from their early-2016 malaise, with the most cyclical assets leading the way.
Key Quotes
“Emerging market equities have outperformed the S&P, led by Brazil, EM currencies have firmed, and industrial and materials stocks have outperformed the broader index. US Treasuries have dipped a bit, as the possibility of a June rate hike is once again on the market’s radar. The market-implied probability of a June rate hike now stands in the mid-40s, up from essentially zero a month ago.
Real rates have not been part of the story, however, rather it is inflation expectations that have firmed on the margin, as the inflation data themselves point ever-more convincingly to a sustained trend higher. These shifts are broadly consistent with a risk-on/growth-on dynamic.
Commodity markets have also made progress, with front-month crude oil prices in the $38/bbl range. Our commodities team views this as a technically induced rally, albeit with growth expectations providing the catalyst. But oil markets remain glutted with supply, and they expect oil will need to trade at prices lower from here.
Gold prices, too, continue to climb even as disinflationary pressures elsewhere in the market landscape are seemingly dissipating. Even the thesis that Chinese demand for a “safe asset” has helped to prop up gold is increasingly hard to square, as risks around a messy CNY devaluation (as captured by CNY risk reversal pricing) have also abated somewhat. Consistent with “growth on” themes, our commodities team remains a seller of gold here.”
Key Quotes
“Emerging market equities have outperformed the S&P, led by Brazil, EM currencies have firmed, and industrial and materials stocks have outperformed the broader index. US Treasuries have dipped a bit, as the possibility of a June rate hike is once again on the market’s radar. The market-implied probability of a June rate hike now stands in the mid-40s, up from essentially zero a month ago.
Real rates have not been part of the story, however, rather it is inflation expectations that have firmed on the margin, as the inflation data themselves point ever-more convincingly to a sustained trend higher. These shifts are broadly consistent with a risk-on/growth-on dynamic.
Commodity markets have also made progress, with front-month crude oil prices in the $38/bbl range. Our commodities team views this as a technically induced rally, albeit with growth expectations providing the catalyst. But oil markets remain glutted with supply, and they expect oil will need to trade at prices lower from here.
Gold prices, too, continue to climb even as disinflationary pressures elsewhere in the market landscape are seemingly dissipating. Even the thesis that Chinese demand for a “safe asset” has helped to prop up gold is increasingly hard to square, as risks around a messy CNY devaluation (as captured by CNY risk reversal pricing) have also abated somewhat. Consistent with “growth on” themes, our commodities team remains a seller of gold here.”